Eurozone governments can do little harm by cutting back on deficits A business with debts facing temporary cash-flow problems might, if it gets through, be able to service its debts comfortably later. By being lent a little more, temporarily, it can generate the growth to repay more later. The same can sometimes be true of a country. By borrowing more it might be able to grow a little faster, smoothing out the peaks and troughs of the economic cycle. Modest deficits and modest debt accumulation can thus aid growth. But no one would claim a country will grow faster by borrowing 99pc of GDP rather than 98pc. Everyone agrees that at some point the process of borrowing even more slows growth, rather than accelerating it. Let's consider why. First, the more debt a country has, the more of its total output each year is pre-committed to paying interest on and repaying those debts, so the less output is available to invest. So increased debt means a country has less flexibility to take advantage of opportunities, so the slower it tends to grow over the medium term. At some point this growth-negative reduced flexibility effect outweighs the growth-positive smoothing effect (described above), so that the net effect of taking on more debt is negative. Authoritative studies suggest the switch-over point is about 90pc of GDP. Greece and Portugal are well above that point already, while countries such as France risk getting there soon. Second, households and businesses may start to wonder how a high deficit will eventually be closed. Will there be higher taxes? If taxes are going to go up in the future, households and businesses will have less resources available for consumption and investment then, unless they save up today. So the threat of tax rises tomorrow can mean less consumption and investment, and hence less growth, today. Third, if an economy runs a very high deficit, its lenders might start to fear it will default. So they start to sell that government's bonds, causing bond yields to spike up, making things like mortgages much more expensive and imposing large losses on those that hold government bonds (such as banks and pension funds). No one disputes that, eventually, these growth-damaging effects of high deficits will dominate. Traditionally, it was thought deficits of around 3pc of GDP would normally be high enough to allow smoothing - that was why a 3pc deficit limit was set in the Maastricht rules. By 2009 the average eurozone government was already running twice that, and some (e.g. Greece) were running five times that. Virtually no developed economy government had, before 2009, ever run deficits of 10pc and more of GDP. Everyone agrees that if the deficit is large enough, cutting it will not damage growth. The question is only whether the deficits were so large in 2009 that cutting them will not damage growth. There is no historical instance of any developed country, in peacetime, running a 10pc of GDP deficit that subsequent analysis suggested would have been better running a 12pc of GDP deficit. There are plenty of examples of countries that ran high deficits that subsequent analysis suggested would have been better running lower deficits. Furthermore, there are many cases of countries cutting much smaller deficits that did not suffer lower growth as a result. A major 2003 European Commission study found that about half the time, cutting even quite low deficits does not result in any drop in growth, even in the short term. Since the 2009 deficits were much higher than that, it's even more likely that cutting them won't have damaged growth. Eurozone members have had no choice but to cut their deficits. But even if they had had a choice, there is no good reason to believe that cutting a 7pc, 8pc, 10pc of GDP deficit actually damages growth, even in the short term. Just because there is a recession in parts of the eurozone now, that does not mean that recession might not have been even worse had governments not sought some control of their budgets.