Parts of Europe paying off debt the hard way

Many countries have been under pressure to reduce their debt burden since the global financial crisis. But results are mixed – and have serious implications for the recovery, ING economists say.

In the August 2014 economic update video for eZonomics, ING senior economist Teunis Brosens explains different methods by which debt burdens can be reduced – or “deleveraged”, as it is also known.

The “hard way”?
Brosens says the hard way of reducing the debt burden is paying down debt.
“It is like these countries have to get by on the same meagre salary, while putting aside additional money to pay off debt. An uncomfortable position,” he says.
“A less painful way is growing income. This also reduces the burden of debt, as a smaller part of income is needed to service debts.”

Parts of Europe are struggling
Brosens outlined debt as a percentage of GDP in the United States, United Kingdom and eurozone countries, as a measure of the debt burden in those places.
The US and UK showed income growth – the “less painful” method – was primarily responsible for lowering the debt-to-GDP ratio.
In “core” eurozone countries, a similar picture appeared.
But in debt-troubled eurozone countries of Spain, Italy, Greece and Portugal, the debt ratio decreased only due to actual debt reduction.

Growth would help ease the pain
“It is difficult to determine how much further debt ratios will fall,” said Brosens.
“But what we do know, is that a return to growth in Southern Europe would greatly help in easing the debt burden.”