By Chris Turner
November 17, 2011
What would US interest on debt be if we were in the European Union?
Today's thought experiment begins with a question: "How much would the US pay in interest expense if the US paid what other Euro countries paid in interest costs?" To answer, we simply need to compare interest costs between the Euro-zone countries and interest costs of the United States.
Recently, in the Republican debates, a couple comments triggered this investigation. The comments made in the debate essentially stated that without intervention, the United States would end up like Italy. To illustrate the Euro-area problem and show the situation the US potentially faces, let's first look at 17 Euro area countries and their Interest Paid on Government Debt (Data available from EuroStat website).
While the Euro began prior to 2001, the timeline in the chart shows the actual average interest rate paid (interest cost divided by outstanding debt) from 2001 to 2010. Note that as the Euro aged, all 17 countries benefited from the general trend toward lower rates when paying interest on government debt. The next chart shows the most recent newsworthy countries (PIIGS plus France and Germany).
Again, as each country issued government debt, the interest rate on that debt decreased over the decade. This does not show the debt amount or ratio of debt to GDP, just the average interest rate. I know what you are thinking: An individual with this fortunate situation would be wise to take advantage of the trend to refinance debt at lower rates (in the case of a home mortgage) and pay off debt faster (more principal toward payments).
Since we are talking government debt, however, with lower interest rates, surely the debt relative to GDP of each country benefited (lower debt overall). The chart below highlights the "frugality" (cough, cough) across the entire Eurozone in their lower-interest-rate environment. This chart clearly illustrates the general desire and ability to increase debt relative to GDP.
Referring back to our PIIGS + chart, we see that when Greece entered the Euro zone, they were already at 100% debt to GDP and proceeded to increase the ratio 50%.
Keep in mind, these numbers only extend to 2010. The entire decade produced gradually lower interest rates (that's good) while most all countries increased debt to GDP (that's bad).
Getting back to our original thought experiment, what about US interest payments? A quick look at the historical interest payments available from FRED shows that essentially the last 20 years, 1990 through 2011, the US interest payments oscillated above and below 200 billion.
All else being equal, just looking at an interest chart might give the impression that total debt may have stayed the same or increased slightly with the lower rates. Another quick peek at total debt shows that debt increased from roughly 4 Trillion to 15 Trillion in the last 20 years while our interest payments stayed around 200 billion. That is a good deal!
Using higher math estimations a 14 Trillion debt obligation with a payment of around 230 billion in interest equates to an rate of 1.64%. With that calculation, we can now compare what would happen if the United States went from paying our cool Fed-induced 1.64% to something a little higher — maybe around the same rates as our Euro brethren when they entered the EU.
The following chart depicts a hypothetical fiscal year interest payment on the 14 Trillion US debt using the same interest rate as the PIIGS + in 2001 (interest rate as reflected in the charts above).
The chart confirms that if the US were Italy, total interest paid would be around 800 billion rather than our 230 billion. The callouts simply show the approximate cost of each government program for added perspective on the interest rate impact upon our governmental debt.
Note that in the previous charts, the highest average interest paid was 6% for Greece. Now, what about a chart showing what the interest costs will be at rates when some of these countries EXIT the Euro! No thanks!