Mario Draghi on Debt, Growth and Europe’s Future

I had the privilege of attending the Karl Brunner lecture by Mario Draghi1 at ETH Zurich on 1 October. In his lecture, the former ECB president described an arrangement with two parts: an independent central bank responsible for price stability, and governments able to manage their debts without leaning on it. He then added a condition that is harder to legislate into existence: an economy that grows. The arithmetic of debt and growth The shorthand we all learned in Econ 101 is r minus g: the average interest rate paid on outstanding government debt minus nominal GDP growth, including inflation. Governments refinance debt gradually, so the average rate matters. So let’s imagine debt equal to 100 per cent of GDP. If the average interest rate is 4 per cent and nominal GDP grows by 2 per cent, the government needs a primary surplus, its balance before interest payments, of roughly 2 per cent of GDP to keep the debt ratio stable (the ECB’s debt arithmetic also includes some other…