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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.