Dapkus, Mindaugas
August 2007
Economics & Management;2007, p713
Academic Journal
The ability of States to manage the financial flows is one of the nations' competitiveness factors in modern global economy. This factor is especially significant because of growing competition for the world-wide financial resources and investments. The results of State's ability in this field of competence manifest through the debt ratio and solvency of nation, i.e. capacity to redeem nation's debt using their entire economic mechanism. Growing national debts gives the interest rates a boost and this amplifies the risks of possible future tax level growth and finally frightens investors to invest in the indebted country. So, the goals of this paper are to evaluate the EU States' public debt situation, as nations' competitiveness factor, and to make proposals for the EU debt problem solving. Here the competitiveness of States is related to its ability to repay debts and all assessments and proposals are made on the ground of debt evaluation method. In this paper for the public debt (and financial competitiveness) evaluation an alternative Inter-generational Debt Morality index is proposed. According to the author, the financial responsibility of current generation must be pertained to the human beings life expectancy, since only in such case minimum moral controlling pressure to the government making economic policy decisions may be ensured. Inter-generational Debt Morality index is estimated as the actual debt redemption period (in years) divided by the quantitative denomination of one generation (here defined as 25 years). There are five evaluation levels of public debt (economic and financial policy) morality, which relate economic policy efficiency of current generation to its ability to redeem public debt. The most fair inter-generationaly responsible economic policy (and most competitive) is then the public debt morality index does not exceed 1 (1 generation - 1G), i.e., public debt should be redeemed within 25 years. The economic policy that enables to redeem the public debt in the period of 2G (50 years) is denominated as Sustainable policy. The marginal debt redemption criterion (called as a Risky economic policy and Risky financial abilities), i.e., debt redemption level of 3G (75 years), is pertained to currently applicable in political level period of national secret preservation (may amount to 75 years) and to the potential human life expectancy. The States that could redeem their debts later than in the period of 3G are denominated as the States with Irresponsible financial-economic policy; finally, those which would never be able to redeem their public debt without changing their economic policy should be treated as those effectuated the inter-generationaly Immoral economic policy with the worst financial competitiveness. Search results and conclusions. While evaluating possibilities of debt redemption, and financial competitiveness, of the EU States the author followed the assumption that there are two main factors influencing the debt ratio: growth rate and interest rate. Both depend on the economic development level of the past period. With application of a regression analysis (using the EU-25 data of 1996-2005) it is estimated that when the level of State's development grows, rate of economic growth deteriorates faster than the interest rate decreases. It is not a beneficial fact which may worsen States' abilities to redeem their debts in the future; it must be evaluated in the planning of the means of EU States economic policy. According to the net debt of 2005 financial years redemption period (Inter-generational Debt Morality index) calculations, only Finland, Estonia, Latvia, Lithuania, Luxemburg, Slovenia, and Sweden were attributed to most intergenerationaly responsible (moral) and most financially competitive group of the EU States.…


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