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.