Opinion

The Euro Area's Debt Hangover

Kim Schoenholtz
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The ongoing difficulties in Greece - combined with the ECB's dramatic actions to ward off deflation - are distracting attention from what may be the euro area's biggest and most pervasive problem: debt.
By Kim Schoenholtz and Stephen Cecchetti
The ongoing difficulties in Greece - combined with the ECB's dramatic actions to ward off deflation - are distracting attention from what may be the euro area's biggest and most pervasive problem: debt.

You wouldn't know it from the record low level of government bond yields, but much of Europe lives under a severe debt burden. Nonfinancial corporate debt exceeds 100 percent of GDP in Belgium, Finland, France, Ireland, Luxembourg, Netherlands, Portugal, and Spain. And, gross government debt (as measured by Eurostat) is close to or exceeds this threshold in Belgium, France, Greece, Ireland, Italy, Portugal and Spain.

Debt levels this high have important long-run consequences. As we have written recently, they are a drag on growth. High debt means that households have more difficulty maintaining consumption when income falls; firms may be unable to keep up production and investment when revenue dips; and governments are in no position to smooth expenditure when revenue falls. More economic volatility means lower growth.

Read full article as published in The Huffington Post

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Kim Schoenholtz is a Professor of Management Practice and Director of the Center for Global Economy and Business.