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Spanish Prime Minister Mariano Rajoy listens to a question during a session at Spain’s parliament in Madrid on Wednesday. Yields on Spanish government debt rose as Saturday's deal failed to calm concerns that Madrid may end up locked out of funding markets.ANDREA COMAS/Reuters

In a speech on Monday in Montreal, Prime Minister Stephen Harper put government debt at the forefront of the crisis in Europe:

"...[T]he international markets have reacted, of course, by increasing borrowing costs significantly for some of the countries with the highest debt loads."

In the speech the Prime Minister goes on to state that the "global economy is grappling with the debt crisis." An examination of the data, however, suggests that debt is not the primary factor.

If this crisis were primarily about high levels of debt, Japanese bonds would have the highest nominal yields on this list, not the lowest. Despite having a debt level of over 200 per cent of GDP, bond markets are willing to lend to Japan at less than 1 per cent interest per year. The United States has one of the highest debt levels in its history. Its bond yields? At a two-century low. Spain had relatively moderate levels of debt before the crisis went into full swing and is now among the countries with the highest borrowing costs.

Country2011 debt-to-GDP ratioTen-year bond yield

We are living in very strange times when a ten-year bond yield of 6- to 7 per cent is considered crushingly high; the 100-year average for a U.S. government 10 year bond is 6.5 per cent. But 6 per cent is a high figure when compared to the sub-2 per cent rates of countries such as Germany and the United States. Bond markets are predicting a decade of very low inflation and very slow economic growth; a 6 per cent nominal interest rate indicates a significant risk premium on these bonds.

There must be other factors which explain why some countries face higher borrowing rates than others. Countries with high and rising bond-yield share three things in common:

1. A recent financial crisis within their borders: Greece had one, Japan did not;

2. Economies which are currently in recession and high and rising levels of unemployment, which make it difficult, if not impossible, to reduce their deficits. Portugal's unemployment rate sits at 14.9 per cent, while similarly indebted (in 2011) Belgium's is at 7.2 per cent;

3. And, arguably the most important, the inability to use monetary policy to deal with macroeconomic fluctuations. Japan, the United States and the United Kingdom all control their own currencies, while Italy, Spain and Portugal do not.

None of this should be taken to suggest debts and deficits do not matter. High levels of debt matter a great deal, as they crowd out the ability of countries to finance worthwhile projects, which slows down long-run economic growth. But turning this economic crisis into a story on debt does not fit with the evidence and ignores the larger structural problems within the euro zone economy.

Mike Moffatt is an Assistant Professor in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business – Western University