The apparent reluctance of governments to cut public deficits, has led many commentators to identify the democratic process as the main obstacle to sound fiscal policies. According to these views, failure to stabilize public budgets is mainly a consequence of distributional struggle: as parties attempt to protect their constituencies from the burdens of stabilization, political deadlocks may arise which prevent either side from implementing its policies.

In Discussion Paper No. 1357, Research Fellow Albrecht Ritschl looks into the debt record of Britain, Germany and France to see whether such interpretations are supported by the historical evidence. Ritschl finds a explanation different from the distributional one. In Europe’s core countries, the rise and decline of public debt burdens were clearly intertwined with wars. The accumulation of deficits is correlated with arms races and war finance, whereas post-war periods typically witness slow but steady declines in debt burdens. This regularity is most clearly visible for Britain, less pronounced for France, and distorted by defaults and currency reforms in Germany, whose debt policies appear to be the opposite polar case to those of Britain. The historical debt record of Europe’s core countries thus shows little correlation with distributional struggles and seems much more interrelated with international conflict and the World Wars. These effects have persisted far into the post-war period and are still visible today: that Germany’s debt position has been more favourable than that of its neighbour is not so much the result of prudence but rather of past misdemeanours and debt forgiveness. Certainly, it is not a measure of the comparative success of German fiscal policy or even the superiority of its social institutions. The paper concludes that the dramatic cross-country differences in debt histories had no visible effect on long-term growth. Pessimism concerning the political capability for stabilization is probably unnecessary, Ritchl concludes.

Sustainability of High Public Debt: What the Historical Record Shows
Albrecht Ritschl