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48 Deleveraging, What Deleveraging 4.2 Eurozone: A policy problem 4.2.1 The Eurozone seen as a single economy In this section, we first consider the Eurozone in aggregate and analyse the sectoral dynamics of savings and debt since the global recession of 2008 as well as the ECB policy in this context. Although we are aware that different countries within the monetary union entered the crisis with different levels of debt and followed different processes of adjustment, the aggregate perspective is of interest in itself given that monetary and financial regulatory policies operate at that level. Moreover, although fiscal and supply-side policies are decided at the national level and common policies have been influenced by distribution conflicts within the union, it is important to understand the ex post result of this complex policy process from the perspective of the union as a whole, since this understanding can help in evaluating the effectiveness of the tools of the monetary union in facing a debt crisis. In what follows, we will abstract from an analysis of political economy issues that may have constrained policy choices. As described in Chapter 2, the ratio of total debt to GDP in the Eurozone increased rapidly in the pre-crisis years, driven by the build-up of private sector debt. However, the build-up of household debt was more muted than in the UK and the US, and the pre-crisis level lower. Interestingly, unlike in the US, the ratio of total debt to GDP in the Eurozone is still higher today than before the crisis (Figure 4.7). Figure 4.7 Eurozone total debt (% of GDP) 400 390 380 370 360 350 340 330 320 310 300 290 280 01 02 03 04 05 06 07 08 09 10 11 12 13 Source: Authors’ calculation based on OECD, IMF and national accounts data. See Data Appendix at the end of the report. In the first part of this section, we will analyse differences in balance sheet adjustment between the US and the Eurozone in order to shed some light on the different paths of debt adjustment in the two economies. In the second part, we offer some considerations about future debt dynamics in the union and we conclude that, given current projections for inflation and
Case studies 49 potential output growth, the Eurozone finds itself in a situation of great fragility and with a lower debt-bearing capacity than the US. Balance sheet adjustment since 2008: The Eurozone and the US Let us recall the main facts regarding Eurozone debt dynamics post-crisis described by Figure 2.3: (i) household debt has stabilised in the Eurozone but, unlike in the US, it has not declined; (ii) public debt has increased in relation to GDP, although less than in the US; (iii) non-financial corporate debt has remained more or less flat; and (iv) financial-sector debt has started to adjust downwards only recently, but later and to a lesser extent than in the US. These differences in post-crisis behaviour are the result of differences in precrisis balance sheet positions between the two economies and in sensitivity to asset price changes, together with differences in the fiscal, monetary and financial policy responses. Households, housing prices and fiscal policy. Figure 4.8 shows that, pre-crisis, the household sector had built up a higher level of leverage in the US than in Eurozone, while the asset-to-income ratio was quite similar. The collapse of US household assets starts before the 2008 recession and corresponds to the decline in housing prices. Similarly, the recovery in household assets coincides with that of housing prices in 2012. In the Eurozone, household assets are more stable and less correlated with housing prices (which in any case, have shallower fluctuations than in the US). On the liabilities side, we see a downward adjustment in the US and a slow increase in the Eurozone which, having entered the crisis with a lower liability-to-income ratio, has now reached a similar ratio to the US. Figure 4.9 shows that the household savings ratio increased from 2006 to 2012, corresponding to the phase of balance sheet adjustment. The deleveraging process is likely to have been facilitated by very aggressive fiscal policy. Indeed, Figure 4.9 also shows that, immediately after the crisis, the US fiscal deficit was almost double that of the Eurozone and the increase in savings in the household sector was almost matched by a decrease in the public sector. In contrast with the US, Eurozone households in 2009-10 decreased their saving rate and, as we have seen in Figure 4.8, increased their liabilities. Neither flow nor stock dynamics in the Eurozone correspond to the typical balance sheet adjustment, but rather to adjustment to protracted weak demand.
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Geneva Reports on the World Economy
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International Center for Monetary a
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International Center for Monetary a
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Acknowledgements We thank Susan Lun
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List of Conference Participants Edm
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Discussions 99 In response to Laure
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Data Appendix Debt typically expres
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References Adrian, T., E. Moench an
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References 105 Jorda, O., M. Schula
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It is widely accepted that high lev
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