Policy Brief - The Fallacy of r – g
The empirical evidence does not confirm the hypothesis that the public debt tends to be more stable in countries where the (real) interest rate is systematically lower than (real) growth
Only in Germany, the correlation between r-g and the debt dynamics turned out as expected, as debt decreased in parallel with lower interest rates. In Italy, the relationship changed over time
Policy Brief - The Fallacy of r – g
Executive Summary
The sustainability of public debt is an essential component of fiscal policy evaluation. The public debate has increasingly focused on the relationship between two key variables, the rate of interest paid on the debt (r) and the rate of growth of the economy (g). When growth is projected to be systematically higher than the rate of interest (r – g < 0), countries do not need to have a (high) primary budget surplus to ensure that the ratio between public debt and gross domestic product decreases over time. In other words,
The empirical evidence does not confirm the hypothesis that the public debt tends to be more stable in countries where the (real) interest rate is systematically lower than (real) growth. On the contrary.
In countries where the interest rate was lower than nominal growth, the debt often increased markedly over the past quarter century (as a percentage of GDP).
The most obvious case is the US, where the debt-to-GDP ratio doubled, from 60% to 120% of GDP, despite a negative r-g for most of the period.
In Japan and in France, debt increased irrespective of the r-g level.
Only in Germany the correlation between r-g and the debt dynamics turned out as expected, as debt decreased in parallel with lower interest rates. In Italy, the relationship changed over time.
Overall, r-g does not look like a good predictor of debt development.
Lorenzo Bini Smaghi
Lorenzo Bini Smaghi holds a degree in Economic Sciences from the Université Catholique de Louvain (Belgium) and a Ph.D in Economic Sciences from the University of Chicago.
He began his career in 1983 as an economist in the Research Department of the Bank of Italy. In 1994, he was appointed Head of the Policy Division of the European Monetary Institute.
In October 1998, he took up the position of Director General of International Financial Relations in the Italian Ministry of Economy and Finance. He was Chairman of SACE from 2001 to 2005. From June 2005 to December 2011, he was a member of the Executive Board of the European Central Bank.
From 2012 to 2016, he was Chairman of the Board of Directors of SNAM (Italy). From 2016 to 2019, he was Chairman of the Board of Directors of Italgas (Italy). He has been Chairman of the Board of Directors of Societe Generale since 2015.
Video: Trump is Back: What is the Future of the EU-US Relationship?
On the inauguration day of Donald Trump’s second presidency, IEP@BU hosted a digital event to discuss the findings of a recent Eupinions survey on the EU-US relationship and their implications.
What was the impact of Trump’s first presidency on transatlantic relations? How has European public opinion on the reliability of the US evolved? And what do Americans think about the EU?
If you’d like to learn more, you can read the presentation of the Eupinions survey here: Old Habits Die Hard: Remaking the Transatlantic Partnership in EU and US Public Opinion
Speakers:
Catherine De Vries (IEP@BU)
Isabell Hoffmann (eupinions, Bertelsmann Stiftung)
Moderator:
Stefano Feltri (IEP@BU)
IEP@BU Events
Which EU Defense Spending to Address the War in Ukraine and Russia?
January 30, 2:30 PM-3:30 PM - ONLINE
A Conversation Based on the IEP@BU Policy Brief: Before Vegetius – Critical Questions for European Defense
There is broad consensus on the need for the EU to increase its defense spending and strengthen its military capabilities. What remains less clear, however, is the ultimate objective of such an effort.
Should the EU’s top priority be to support Ukraine’s resistance in the short term, or to build a robust deterrence—primarily against Russia—over the medium term? Can it effectively pursue both goals simultaneously? And when it comes to the eastern front, what security approach should the EU adopt?
Drawing on the recent IEP@BU Policy Brief Before Vegetius: Critical Questions for European Defense, this discussion will explore how the EU can address these pressing strategic challenges.
Speakers:
Olesya Vinhas de Souza, a leading defense analyst with expertise in Russian security issues and cybersecurity at the NATO Defense Council.
Andrea Gilli, lecturer in Strategic Studies at the University of St Andrews, IEP@BU research fellow, and co-author of the IEP@BU Policy Brief Before Vegetius: Critical Questions for European Defense.
Stefano Feltri, IEP@BU communication advisor.
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When Will Germany Be Back?
February 24, 2:30 PM-3:30 PM - ONLINE
The day after the federal snap election, we will explore the European consequences of the vote against the backdrop of Germany’s economic challenges.
In November 2024, a coalition government collapsed when Chancellor Olaf Scholz dismissed Finance Minister Christian Lindner, highlighting Germany’s ongoing struggle to balance its political ambitions, renewed security priorities, and stringent budget rules.
For the first time in decades, the European Union faces a dual leadership vacuum in Germany and France—two pivotal member states in EU politics.
Meanwhile, geopolitical and economic challenges continue to escalate: the war in Ukraine demands unwavering commitment from the EU's leading states and institutions, and Donald Trump’s return to power introduces uncertainty to global economic and multilateral governance.
Join us as we debrief the European implications of the German federal elections with Wolfgang Munchau and Diana Pieper.
Speakers:
Wolfgang Munchau is one of the foremost commentators on EU economic and political affairs. He is the director of Eurointelligence and the author of the recent book Kaput: The End of the German Miracle.
Diana Pieper is a Berlin-based journalist with Die Welt and an IEP@BU Media Fellow.
Stefano Feltri, IEP@BU communication advisor, will moderate the conversation.
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The IEP@BU Mission
Founded by Bocconi University and Institute Javotte Bocconi, the Institute for European Policymaking @ Bocconi University combines the analytic rigor of a research institute, the policy impact of a think tank, and the facts-based effort of raising public opinion’s awareness about Europe through outreach activities. The Institute, fully interdisciplinary, intends to address the multi-fold obstacles that usually stand between the design of appropriate policies and their adoption, with particular attention to consensus building and effective enforcement.
The Institute’s mission is to conduct, debate and disseminate high-quality research on the major policy issues facing Europe, and the EU in particular, its Member States and its citizens, in a rapidly changing world.
It is independent from any business or political influence.
The IEP@BU Management Council
Catherine De Vries, Dean for International Affairs and Professor of Political Science at Bocconi University
Daniel Gros, IEP@BU Director
Sylvie Goulard, IEP@BU vice-President, Professor of Practice in Global affairs at SDA Bocconi School of Management
Silvia Colombo, IEP@BU Deputy Director
Carlo Altomonte, Associate Professor at Bocconi University and Associate Dean for Stakeholder Engagement Programs at SDA Bocconi School of Management
Valentina Bosetti, professor of Environmental and Climate Change Economics at Bocconi University
Elena Carletti, Dean for Research and Professor of Finance at Bocconi University
Eleanor Spaventa, Professor of European Union Law at Bocconi Law School
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