The State of Growth in Europe

The recent debate about austerity and the relationship between public debt and growth, has missed a key point. What matters is not debt (for or against), but what kind of spending that debt consists of. If public sector spending consists of areas that induce (endogenous) growth through increases in productivity and innovation—such as education, human capital, skills, research, and new technologies—then it is likely that the debt/GDP ratio (what actually matters) will be lower than if that spending is on areas that increase the numerator and not the denominator.