Solving the Problem of Sovereign Debt
This chapter presents a proposal to solve the sovereign debt problem once and for all. The idea of granting interest-free loans to the state, from the previous chapter, is developed further and elaborated in detail: central banks could be allowed to extend loans of up to 50% of GDP to states—or a different limit. At the same time, states would not be allowed to become more indebted than this limit, with this limit being anchored in constitutions. States should only be allowed to take out loans for two purposes: infrastructure projects from which future generations also benefit and measures to counteract recessions. An independent parliamentary committee could authorize new debts. If a government exceeds the constitutional limit of 50% of GDP, automatic stabilizers could come into force, proposed here as higher taxes on property and inheritances. This would be an incentive for governments not to exceed the limit—otherwise they would have to take responsibility for potentially unpopular automatic stabilizers. In any case, the sovereign debt problem would be resolved.