FALSE ALARMS

Wake-Up Call On Debt

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  • Why it matters

    Why it matters

    Debt-financed spending will not save Europe, says the author. Instead, it could hasten the next financial crisis.

  • Facts

    Facts

    • In the five years before the global financial crisis hit in 2008, private-household debt in the euro zone rose from €3.52 trillion to €4.89 trillion, or about $6.2 trillion.
    • Including businesses, debt in the euro-zone private sector rose from 52.8 percent of gross national product in 2008 to 54.5 percent in 2013.
    • In spite of the financial crisis, private assets in Europe increased 16 percent from 2008 to 2013.
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    Audio

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The pressure on Germany to ease austerity policies is increasing with every week. A chorus of voices – from Brussels, Rome and Paris to London and Washington – proclaims that the euro-zone economy can only be revived by new spending. At the same time, the European Central Bank is doing its best to force banks to issue more credit. The belief is that if the private sector runs up debt, the economic upturn will come.

But a simple truth is disregarded in these arguments: If entrepreneurs in France don’t believe their home country is a good place over the long term to build a new factory, then they won’t take on debt to make the investment.

Nor will workers in an Italian company apply for a car loan, if they’re afraid of losing their jobs. Neither of them would – even if they had to pay almost zero interest for the loan. And their banks wouldn’t issue credit if they don’t believe in a positive economic future for the country where they operate.

So is the biggest problem in the European economy really that banks are not issuing enough credit in the private sector? Take a look at the statistics for an answer.

In the past years, households in the 18 countries that use the euro have not reduced their debt. On the contrary, in the five years before the global financial crisis hit in 2008, private-household debt rose almost 40 percent, from €3.5 trillion ($4.7 trillion) to €4.89 trillion. In the following five years of the crisis, up to the end of 2013, indebtedness did not decline, but instead increased another 7 percent to €5.23 trillion. That corresponds roughly to the economic growth during that period.

Europe doesn’t need more bank credits or a new flood of debt-financed infrastructure projects. It needs entrepreneurs, who believe the continent is headed in a positive direction.

For the entire private sector in the euro zone, including businesses, debt rose from 52.8 percent of gross national product in 2008 to 54.5 percent in 2013. These figures contradict the widely held argument that Europe’s economy is suffering because the private sector is struggling under pressure to reduce debts.

If the private sector isn’t to blame for slowing economic recovery in the euro zone, does the responsibility lie instead with the supposedly brutal austerity policies of individual countries such as Germany?

A look at the numbers shows that government debt as a percentage of GNP shot up from 70.1 percent in 2008 to 95 percent in 2013. In absolute numbers, it increased by 40 percent to €9.1 trillion, or about $11.5 trillion. So both the private and public sectors are carrying more debt than before the financial crisis.

But as always, there are two sides to this coin. According to Credit Suisse, private assets in Europe increased from 2008 to 2013 in spite of the financial crisis – by 16 percent (adjusted for currency-exchange effects) to €76.3 trillion. Most of that is within the euro zone. So there is truly not a lack of private capital. The problem is that its owners aren’t investing it in European businesses.

In the end, what do these figures say about finding the right economic policy? It’s simple: Those holding plentiful private capital have to be motivated to invest in the euro zone. Europe doesn’t need more bank credits, and certainly not a new flood of debt-financed infrastructure projects. Instead, it needs entrepreneurs who believe the continent is headed in a positive direction.

Sure, those businesses need a modern infrastructure and well-trained workers. But they also need a reasonable cost structure and an economic policy that welcomes investors rather than scaring them off with bureaucracy and hostility to technology.

The euro zone is no “blessed isle” where beneficent central authorities in Frankfurt, Brussels or Berlin protect individual countries from the pressure of global competition. Governments must explain to their citizens that the highest social spending levels in the world are not compatible with weakly growing economies and declining populations.

Whoever condemns this as a neoliberal conspiracy against the welfare state is a demagogue. And whoever puts hope in massive, debt-financed spending is only shortening the waiting time until the next crisis.

 

To contact the author: heilmann@handelsblatt.com

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