Recovering from large government debt without currency devaluation

Question

Current, Greece has a debt of roughly 175% of GDP. The new government has announced it wishes to negotiate a write-off, something Eurozone leaders have so far refused. From prior knowledge and this post, I understand that governments may want to stimulate consumption when the economy is doing poorly, and have budget surpluses / pay off debt when the economy is doing well. Since the beginning of austerity, the Greek economy has shrunk by 25%, and unemployment is now 27%. I have mainly read economical opinions arguing that austerity is harmful and needs to stop, but I the sources I read are probably not representative.

Is there any historical precedent of a country that recovered from a 175% debt, without either having substantial debt write-off, or a currency devaluation? By recovering I mean: returning to substantial economic growth, increasing standards of living compared to crisis conditions, and a public debt shrinking to become substantially less than 100%. If so, how did they do it?

Answer 1

By one estimate (here is another) , as a result of WWII, the United Kingdom saw a debt of more than 200 percent of GDP. They never defaulted on their debt after reaching that level. I believe they never did anything radical, just systematically growing government spending more slowly than national income, thus gradually eroding the debt as a fraction of GDP.

The paper Sustainability of High Public Debt: What the Historical Record Shows may also be of interest.

The paper looks into the debt histories of three European countries, Britain, France, and Germany, to study three questions. First, are there historical parallels to the accumulation of high debt in peacetime that has taken place in the past decades? The answer to this is mostly in the negative. National debt was high during long periods but usually related to wars or their financial aftermath. Second, how were large debts reduced, and that were the factors determining decision-making? Recent research has emphasized the role of social conflict in this context. We find that although this may play a role, the dominant effect may have come from international financial relations. Third, what are the macroeconomic effects of budget stabilization, and does it pay off for a country to repudiate or inflate away its debt? The short-run evidence is mixed, as the success of debt default has varied considerably. In the long run, however, stabilizing the budget pays off, as there seem to be no lasting adverse effects of fiscal austerity on a nation's growth performance.

Answer 2

The most widely used mechanisms for crisis recovery in the developed world are:

• Quantitative easing, QE, which is basically the monetization of goods and services from the private sector in exchange for bonds. Successfully implemented in the US.

• Austerity, or local devaluation in terms of reducing the wages and prices, which is done by the reducing of public spending and proceeding towards a direction of minimal state, that will mean minimal spending.

It should be noted that crisis recovery is strongly related with the present state and structure of the local, regional and global economy and thereby depends on different parameters, as it works by different rules¹. Consequently, I wouldn't consider thinking by analogy, i.e. in terms of historical precedence a valid strategy for problem solution.

The problem should be (could be) tackled only in terms of first principles of the economy, in your case in terms of first principles of the EU economy, which will inevitably result in a solution lying outside Greece itself and more specifically in the rebooting of the EU zone and recompilation of the regulations governing it in the direction of a economically (and politically) equal / homogeneous monetary union with surplus recycling mechanisms that assure the financial distribution in the deficit countries in the form of productive investments (that will in turn produce the needed growth), instead of distributions in the form of loans (as in the current situation).

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^{1. The currently established economic and political regulations.}