Deleveraging and fiscal consolidation – not a good combination

This article on Credit Writedowns discusses the on-going credit contraction in the Eurozone, both in households and the private sector.

Given current circumstances, with increasing unemployment and faltering demand, it is not at all surprising that these sectors are deleveraging. After all, many households in Europe are swamped in consumer debt or mortgages, while houseprices in some countries are declining. Also firms want to be as little exposed to debt as possible given weak demand (domestic and global). This also has an effect of course on the balances of banks, which are then also deleveraging (see the link for the analysis).

With many governments either forced to “consolidate” or voluntarily “consolidate”, this is not a good situation. It means that demand within the Eurozone is shrinking even more – which in a way can be seen in the growing current account surplus of the EU with regard to the rest of the world. This is of course how the German ideology would like to have it, but the Eurozone/EU is simply too big an economic entity to employ such an economic growth strategy (See here for an analysis; in short – the EU is not a small open economy).

It remains to be seen how it all develops. The Ukraine situation is difficult and might affect countries like FInland and the Netherlands much harder than anticipated. But these signs of credit contraction and on-going deleveraging are not boding well for the near future.

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