Τρίτη, 14 Ιουλίου 2015

The Uncomfortable Truth About Debt

If it’s 1 a.m., it must be Greece.
eu-greece debt 2 fotolia montage
Looking beyond Greece’s debt. Source: Fotolia [M]

Endless summits are the stuff of nightmares for European leaders who have spent five years attending meetings that run late into the Brussels night and morning. It was true again over the last 24 hours, as German Chancellor Angela Merkel and her counterparts worked through the night to hammer out a dealthat keeps the Mediterranean country within the 19-nation euro zone.

The mere fact that Germany’s finance minister Wolfgang Schäuble raised the possibility of Greece’s exit from the euro zone during the talks, and that German policymakers have led skeptical euro zone countries in demanding tough structural reforms from cash-strapped Greece in exchange for aid, has been a source of consternation around the world.
But perhaps Germany’s reason for sticking to its principles in the case of Greece – demanding that the European Union’s rules be upheld and that each country in the euro zone be made to keep government spending in line – is that policymakers here see a much bigger problem on the horizon.
The bitter truth is that Greece’s debts, a €340-billion mountain that has stymied the country’s economy over the past five years, pales in comparison to the wider European mountain of debt, and the even bigger global mountain of debt standing.
Those debts have exploded since the global financial crisis started in 2007. The debt mountain has left a series of global economies around the world at the whim of banks, pension funds, and hedge funds that have filled their coffers in the hopes that this will magically bring about new growth and a better life for citizens.
It’s a sort of stimulus-driven brand of capitalism that has spread itself around the world, driven by economists in the United States, Britain and elsewhere.
But it’s also a brand that runs very much counter to the German psyche and more conservative economic way of thinking, which has long been criticized for its inclination to save rather than spend. It’s part of what explains why the German public has strongly supported Mr. Schäuble’s tough stance in talks with Greece over the past days, months and years.
This brand of capitalism could soon blow up in everyone’s face. The slogan seems to be: be happy now and pay back later. The trouble is that this promise, one that helped fuel the excesses ahead of the 2008 financial crisis, could turn sour when that “later” date comes around.
A sort of stimulus-driven brand of capitalism that has spread itself around the world. It’s a brand that runs very much counter to the German psyche.
Global debt has more than doubled from about $87 trillion in 2000 to $199 trillion in 2014. Everyone has played a role: households, firms and governments. A 120-page report on the topic by the McKinsey Global Institute, or MGI, begins with a note of exasperation.
“After the financial crisis of 2008, as well as the longest and deepest recession since the Second World War, global economies were expected to start bringing down their debt. It didn’t happen,” the study noted.
Government debt alone has nearly doubled since 2007 from $33 trillion to $58 trillion. Three quarters of this has come from wealthy industrial nations. That itself is troubling, because unlike fast-growing developing economies, wealthy nations will be hard-pressed to pay off their debts in the coming years through higher economic growth.
Greece, in that sense, is merely a symptom of a much larger problem. Athens’ money problems might look big in relation to their economy – about 180 percent of GDP – but their total debt mountain of €320 billion is a footnote compared to nearly 10 trillion in debt facing the 19-nation euro zone.

A Mountain of Global Debt 1-01 (2)

Greece makes up about 3.3 percent of the euro zone’s total debt bill, or 2.5 percent of the debts of the entire 28-nation European Union. Italy alone has a state debt mountain totaling €2.176 trillion, or about 133 percent of economic output. France owes €2.107 trillion (96 percent of GDP) and Spain €1.095 trillion (about 96 percent of GDP).
Even Germany, a country that is repeatedly criticized by the international community for not spending enough money in the ongoing debt crisis, owes €2.152 trillion in government debt, about 72 percent of GDP, though the direction at least is down.
Overall, government debt in the euro zone has climbed nearly 60 percent since 2007; about €3.6 trillion has been added to the total bill, while the continent’s still-sputtering economy grew just 0.6 percent.
Germany is the only one of the 19 countries using the euro currency that has managed to balance its budget and start repaying some of that debt.
That leads us to an uncomfortable truth: The future of the euro zone, and whether it is here to stay, will not be decided in Athens. It will be decided in Rome, Madrid or Paris.
Europe’s leaders can insist that they have rules in place to prevent a future crisis – the “Maastricht Treaty” that laid the groundwork for the euro back in the 1990s committed each country to running an annual deficit of no more than 3 percent and a total debt load of 60 percent of GDP.
Those rules were strengthened in the aftermath of the debt crisis that has faced Europe in the last five years, while a €500 billion emergency bailout fund has been set up to prevent the problems of one member state from extending to all of them.
But the rules on curbing debt have been broken too many times to be believed.
Take France. The debt problem there goes back much further than the 2008 financial crisis. Since 2002, the year that euro coins and bills were first introduced on the continent, Paris has failed to meet the 3-percent deficit limit 12 times. Despite repeated warnings from the European Commission, French President Francois Hollande has continued delaying reforms to bring spending back in line.
Instead of punishing France for its transgressions, Brussels has so far turned a blind eye. “Countries don’t like to be lectured by Brussels,” E.U. Commission President Jean-Claude Juncker has said.
Or take Spain: While it’s true that Prime Minister Mariano Rajoy has managed to bring down the country’s annual budget deficit by an incredible 6 percent from its peak, the euro zone’s fourth-largest economy still has an annual budget deficit of 4.3 percent – above the 3 percent limit demanded by Brussels.
And the trend, if anything, has been to loosen the belt rather than tighten it: Fearing a challenge from left-leaning parties, Mr. Rajoy has recently promised tax breaks totaling €5 billion and the repayment of Christmas bonuses to public workers retroactively to 2012 – another €2.5 billion bill.

A Mountain of Global Debt 2-01 (2)

Europe is not the only continent still betting on a foreign-financed boom. Credit has become the new opiate of the people. The United States alone owes a whopping $17.63 trillion – an increase of 180 percent since 2007. Britain’s debt mountain has grown 160 percent over the same period.
Japan, which already has a record debt load of 250 percent of GDP – albeit much of it in the hands of the Japanese public rather than foreign investors – has seen its debt surge another 70 percent since 2007.
Debt, in fact, has been a way out of a crisis that was fueled by debt in the first place. Public debt of governments has merely replaced the massive private debts built up by households ahead of the 2008 crisis. And this, despite the fact that a massive credit bubble caused the financial crisis in the first place.
The next time could be worse: This time, the loans on the line haven’t come from hedge funds, investment banks or other speculators. They’ve come from the taxpayer.
So what has prevented this debt-heavy system from collapsing so far? Much of the credit goes to central banks.
Europe is not the only continent still betting on a foreign-financed boom. Credit has become the new opiate of the people.
The balance sheets of the central banks of the Federal Reserve, European Central Bank, Bank of Japan and Bank of England have surged by some 416 percent since 2007 to €50.6 trillion.
Central banks have the power to stabilize the system, but they lack the power to change it. This power falls only to governments, which have shown little inclination to engage in the kind of broad structural reforms needed to reduce their dependency on state debt.
Using the central bank printing press over the short term may seem to ease the problems facing the global economy, but over the longer term they act like a poison that removes incentives for governments to change the system.
This is not the first time the globe has faced a massive debt mountain that it has to reduce.
The U.S. economists Kenneth Rogoff and Carmen Reinhart counted 250 state bankruptcies since the beginning of the 19th century, including four in Germany and eight in France.
The rapid increase in debt in the aftermath of an economic downturn is also not unusual. Wars, financial crises and other shocks to the system have long pushed governments into the deepest red. It was the case after the oil shocks of the 1970s and the case in Germany after East and West reunited in the 1990s.
Such unexpected shocks to the system can be managed well if countries have set money aside for such emergencies in the good times. Only this time, hardly any developed country in the world has such a rainy-day fund. When the world hasn’t needed to be saved from crisis, most governments have used their surplus cash for pet projects and giveaways to the public.
That inability to save even when times are good is what has made balanced budgets such a rare achievement these days. When Wolfgang Schäuble, Germany’s finance minister, proudly announced in 2014 that the country would balance its books this year, it marked the first time in 45 years.
The United States celebrated its last budget surplus in 2001. And Japan hasn’t seen a surplus since 1992.
Such deficit spending won’t be possible for ever. Many developed economies are facing increasingly difficult demographic challenges as their populations become older – a fact that will put an increased burden on state pension and health care funds.
The European Commission calculated that Germany’s demographic shift will cost the state about half a trillion euros additionally by 2060. Spending on public programs for pensions, health care and hospices could rise from 19 percent of GDP to 24 percent of GDP.
Hardly any industrial nation on the planet is prepared for this ticking demographic time bomb.
Perhaps that’s because most economies around the world still seem to be fighting more current economic crises: The International Monetary Fund last week cut its forecast for global growth this year to just 3.3 percent, the result of weakening productivity growth in many countries around the world.
U.S. economist Larry Summers has long decried the “secular stagnation” of the global economy – and called to more state investment in infrastructure and other areas to help solve the problem.
In reality there are two simple options to get out of this global debt trap: save or grow? It is these two options that mark the demarcation line in the current global debate over how to get the global economy back on track.
On the one side are austerity politicians like Wolfgang Schäuble, a supporter of “growth-friendly consolidation.” His views fall back on a long conservative economic history in Germany, led by Ludwig Erhard, who argued that sustainable growth, especially in a time of high debts, can only be achieved through sustainable consolidation.
The idea is that restoring trust in state budgets, by curbing spending, is the only way back to growth.
Germany is the success story of exactly such an austerity-driven policy. Europe’s largest economy survived the 2008 financial crisis better than many of its peers, thanks in part to a tough previous decade that was characterized by relatively low government spending, low wage growth and labor market reforms.
The success of such policies in Greece is why Chancellor Angela Merkel and her finance minister have sought to apply this tough-love recipe to the economies in southern Europe, many of which saw their debts spiral out of control soon after the 2008 financial crisis hit.
“One cannot permanently live above ones means,” Ms. Merkel has said.
For many Anglo-Saxon economists like Paul Krugman, such a policy has rested on a fundamental misunderstanding. The idea that everybody should save at the same time is a “recipe for disaster,” the Princeton professor and Nobel laureate has said.
That’s because the majority of U.S. economists see the debt crisis primarily as one of a lack of private demand, rather than a problem of supply. Companies and households have been forced to reduce their own massive debt load built up in the run-up to the financial crisis. That demand gap, they argue, needs to be filled by government spending.
In Europe, this means that wealthy countries like Germany need to fill the gap that has been left by drastic spending cuts seen in southern Europe.
U.S. economists can point to the United States as an example of their model’s success. The economy is growing again thanks in part to an $800 billion stimulus package that was agreed shortly after the 2008 crisis broke out.
So which is the right model? Saving or growth? According to the McKinsey Global Institute, both recipes can’t necessarily be easily transferred to other countries.
Saving will be a heroic task: MGI calculated that the budgets of countries like Japan, Italy, Spain, France and Britain need to be cut on average by about 2 percent of GDP to break the debt spiral. It’s an enormous demand, and a gamble that could fall flat on its face if it also winds up choking off economic growth in these countries.
Nor is growth necessarily the answer, as many countries have failed to produce the kind of growth needed to pay down their debts. MGI calculated that growth needs to be double what has been forecast for countries like Spain, Japan, Portugal and Finland in order to bring down their debt levels. That, too, is an illusion at a time when markets are forcing most countries to save rather than spend money.
And so every country has to find its own way out of this global debt trap. Consolidation undoubtedly has to be part of the mix, but each country needs to find the right pace, combined with other economic policies that can stimulate demand.
For some countries like Greece, it might require higher taxes on the wealthy. In others, it might require higher inflation targets for central banks as a means of paying down the debt. Nearly all countries require additional structural reforms to improve productivity and help their economies grow faster.
Some countries, like Greece, will also probably need some of their debt to be forgiven. Studies by the IMF and World Bank have shown that debt relief in emerging economies in the 1990s helped lead them back on a path to growth.
But debt relief is also a moral hazard. This is especially true for Germany, where the concept of financial debts and morality are linked perhaps more than in any other country. It starts with the language: the word “debt” is also the word for “guilt” in German. The repayment of debt is seen as a moral obligation – almost like an 11th commandment.
The Greek crisis has certainly made one thing clear: Debts, once they go above a certain limit, can lead to a loss of sovereignty. Sovereignty ends where the interests of creditors begins. The only way back to sovereignty, and to restore confidence in the long run, is a clear commitment to winding back deficits.
Jens Münchrath is based in Düsseldorf and heads Handelsblatt’s coverage of economics and monetary policy. Torsten Riecke is Handelsblatt’s international correspondent, reporting on international finance and economic topics. Christopher Cermak, an editor with Handelsblatt Global Edition in Berlin, contributed to this story. 
sourche: https://global.handelsblatt.com/edition/217/ressort/finance/article/the-uncomfortable-truth-about-debt

Δεν υπάρχουν σχόλια:

Δημοσίευση σχολίου