UPDATE: the title of today’s Wolfgang Munchau’s article sums up nicely also this post of mine: If Europe insists on sticking to rules, recovery will be a dream
This new Bruegel post is dense reading, but I think it is important, especially when they write bits like this:
For the Netherlands, the austerity was gratuitous. At its relatively low level of public debt ratio, the Netherlands could have afforded fiscal stimulus. GDP growth would have been higher and, it is possible, that the public debt ratio may have been lower. In the Netherlands, the costs of austerity were especially high because the private debt burden was substantial (since households had borrowed extensively to buy homes). In such a circumstance, a more stimulative fiscal policy is particularly desirable since the increased incomes help to pay down debt, which in turn opens the space for further spending and economic growth. Today, the Netherlands has to deal with a more serious public debt problem than in 2011 and with an undiminished private debt burden. Together, these will continue to dampen growth as the necessary deleveraging occurs over time.
The Netherlands example has a more general echo through the euro area: even as the public debt ratios rose while fiscal austerity was pursued, the private debt burdens did not fall (Figure 6a). In contrast, household debt ratios fell across virtually every state in the United States (Figure 6b) While U.S. commentators have been critical of the insufficient policy effort to alleviate mortgage-related distress (see Mian and Sufi, 2014), the extent of such efforts was substantially greater than in the euro area.
I am thinking of Finland in the first place, because economically it is not going well here, and a recent note by Statistics Finland shows that private indebtedness is still rising (although the household savings rate is going up) At the same time housing prices are seen to be falling in many places (although not necessarily in the capital region).
Keeping in mind what e.g. Richard Koo has written about balance sheet recessions, I find it very worrying that a) Finnish households AND corporations are quite indebted (although not as much as in some other Nordic countries, but they aren’t a member to the EMU) and b) housing prices are coming down, which will put strain on households, in particular with growing unemployment. Finland has big problems right now with loss of certain sectors/key companies (i.e. the Nokia drama) and the structural change in the forest industries is not yet completed. But these things are worrying especially because the government is hell-bent on reducing public debt, while this is not a problem. Deficient demand is the problem, and no supply-side reform will help one inch with that. In terms of Koo’s recommendations (based on Japan’s lost decades), the government should borrow all it can to provide a) demand and b) time for corporations and households to clean up their balance sheets. At the moment, there is no reason (other than the misguided rules of Maastricht and the Fiscal Compact) that the government shouldn’t borrow the money to do this. But since Finland is very firm about sticking to the rules (and by now it has to, politically speaking, in Europe), this is unlikely.
So without putting numbers out (which have been in many cases (ECB, Commission, banks) wrong all the time), I am quite afraid that Finland is very securely trapped – logic determines that the government should spend in the context of increased household saving/high indebtedness but this is not politically feasible. It might be that the USA is indeed recovering, but this probably will not pull the whole world economy on dry land.
