Zsófia Barta - Exploring the Many Faces of Public Debt Politics

I am a political economist: I study the interactions of politics and markets, of power and money, and I do so in the context of prosperous developed countries, particularly in Europe. 

I pursued my doctoral studies in the European Institute of the London School of Economics and Political Science, which is an interdisciplinary hub of thinking about all things Europe, populated by political scientists, economists, political economists, philosophers and sociologists. It instilled in me a profoundly interdisciplinary way of thinking about research in the social sciences. Before coming to the Center for European Studies and Comparative Politics at Sciences Po, I was an Associate Professor at the University at Albany, which is part of the State University of New York (SUNY) system, and I also did a number of fellowships at the European University Institute in Florence, Harvard University, and the Central European University.

My main research interest throughout the years has been government debt. Initially, I was curious about why many rich countries amassed large stocks of debt in the 1970s and 80s, making them vulnerable to changes in the economy and in financial market sentiments which can trigger crises like the eurozone crisis we saw erupt in the early 2010s. I wanted to understand what differentiates the countries that get themselves into such troubles from the ones that don’t. This is what my doctoral work was about, and then my first book, In The Red: The Politics of Public Debt Accumulation in Developed Countries (University of Michigan Press, 2018). In this first research, I found that the countries that got the most indebted were the ones where the politics of public spending was very polarised – with very clear divisions between the main beneficiaries of public spending and the main contributors of revenues, like in Belgium, Greece, Italy, or Japan . Such countries have a much harder time balancing their budgets and can get stuck on a trajectory of endless borrowing. 

After studying the origins of public debt, I started to look at what happens to governments once they are indebted: how they become dependent on financial markets for funding and what that dependence means for their ability to choose the politics and policies they want to. 

Yes, in trying to understand the consequences of public debt, I focused on a special set of financial market actors, credit rating agencies (Moody's, Standard & Poor's, and Fitch), whose role is to judge whether a country is creditworthy. My co-author and I have found that rating agencies impose significant constraints on what governments can and cannot do if they want to be able to borrow at a low interest rate. For example, if countries appoint a left-leaning government, they have a much larger chance of being downgraded than when they choose a right-wing government. And of course, that's really problematic for democratic sovereignty, because people choose governments and think that those governments will do what they voted for, but actually governments might be forced to do what the rating agencies ask them to do.

It is often assumed that credit rating agencies dole out rewards and penalties on policies according to neoliberal principles, but one of the main contributions of our book is to show that this is not the case. While they don’t focus on the best interest of the countries they rate, rating agencies are not agents of neoliberalism either. For example, they are not necessarily for low taxes and low spending. And this is rather counterintuitive. Rating agencies do oppose the types of government spending that are hard to cut. For example, they award much lower ratings to countries that have high social benefits and pensions. But they reward countries with types of public spending that could be easily cut: for example, if a country pays a lot for education or if it has a high proportion of public employees, that actually counts as positive, because those are resources the country can reallocate towards paying debt if the economy suddenly slumps or if there is a big financial crisis brewing. 

Also, as a general rule, rating agencies favour lower taxation over higher taxation because low taxes suggest there is more elbow room for collecting additional revenues. But on the other hand, they like high corporate taxation because if a country can keep its companies and tax them very heavily, that shows that it can crank up its taxes and generate more money if needed.

In a separate paper (currently under review), I also showed that rating agencies put constraints on governments’ ability to prepare for climate change. They actually penalise mitigation, adaptation and resilience building, which is a really big issue. This is because, in their ratings, they account for all the current costs of mitigation, adaptation and resilience building, but they do not offset those costs against the costs of climate disasters that might happen in the future, but whose probability is currently impossible to predict. We can’t fault rating agencies for not being able to predict the costs of future catastrophes, but the fact that these market actors have the power to penalise the green transition because they can only calculate the short-term costs and not the long-term benefits is a major problem. 

My current research still looks at the relationship between governments and financial markets, but from a slightly different angle. Whereas my second book looked at the conscious processes whereby market actors scrutinise government policies and politics, in this new project, I am looking at the consequences of processes that have much less to do with what governments do (and how markets like it) and much more with how markets use government debt for their own purposes. The bonds of prosperous governments, which are often considered safe assets, are very often used to make highly risky transactions appear less risky, and this is done in very obscure financially engineered products. By embroiling government debt in transactions that are both risky and also very imperfectly understood, market actors are undermining the stability of the markets where government bonds are bought and sold, with grave implications for governments’ ability to borrow and access the funding they need. And so, the argument is that governments can go bankrupt for reasons that have nothing to do with what they do, but everything to do with these strange financially engineered products that most people, even in the markets, don't understand. This has major implications for policy. Not only do governments have to choose their policies carefully to avoid upsetting rickety markets, but they will also have to spend huge resources once the markets for their debt become unstable. 

A good example of such instability is the UK gilt crisis of September 2022, when a small initial disturbance in UK government bond (gilt) markets spiralled into a precipitous drop in prices that could have wreaked havoc both on financial markets and on British public finances if the Bank of England hadn’t heavily intervened to buy gilts (to the tune of almost 20 billion pounds, or 23 billion euros). This meltdown was caused by a financial innovation called liquidity-driven investment by pension funds, but there are a number of other financial innovations involving government bonds whose systemic risk implications are poorly understood. 

I am currently cataloging the types of transactions that create such dangers for governments and in the next phase, I am going to interview policy makers in central banks, debt management offices, regulatory agencies, etc., to ask them how they deal with these new risks on their horizon.

As I mentioned, my work is characterised by an interdisciplinary approach, and I am delighted to find a fantastic interdisciplinary research community here. My work blends international political economy, sociology, finance, economics and political science, and I cannot think of a more perfect combination of scholars excelling in those fields than what we have here at the Center for European Studies and Comparative Politics and in the Sciences Po community at large. This kind of conversation between different multidisciplinary areas is not just possible, but many of the colleagues are actually interdisciplinary themselves within their own work, and this is extremely attractive to me. 

The other reason why I am very happy to come to Sciences Po is because there's such an openness to the interdisciplinary approach also in teaching. This semester, I am teaching the political economy of public debt in Europe, and that's only possible in a place like this.  Because if you really seriously want to look at government debt, you have to blend not just the economic perspective, but also the political and political economy perspective. The students enrolled are from public policy, European affairs, corporate and public management and it's the best blend, in the sense that those are people who are going to be open to approaching the same issue from many different disciplinary angles. 

At one point, I would love to give a course on the political economy of Europe, because if you want to understand why we can't resolve climate change, why we have all of these anti-system parties coming up, why we have a huge increase in inequalities across the developed world, why we are getting all these geopolitical tensions, you have to explore their common political-economic roots.