Economic optimists refer to the impetus from cheaper oil. However, private and corporate debt accumulated in the euro zone prior to the financial crisis will probably dampen investment and consumption for at least another four years. These burdens are another argument in favour of broad-based government bond purchases by the ECB, of which ECB president Mario Draghi gave strong hints at yesterday’s press conference. The US on the other hand is much further advanced with deleveraging, which is why its economy is growing at a stronger rate. This advantage is strengthening the dollar. Low interest rates encouraged debt accumulation before the crisis In arithmetic terms, the falling oil price has boosted income in the euro zone by an impressive 0.8%.1
However, we hold to our below-consensus forecast of 0.8% GDP growth next year. Firstly, part of this money would be spent on imports. Secondly, and much more significant in the longer term, are the after-effects of bursting the credit bubble. Favourable financing terms allowed debt to surge in many euro zone countries. In the euro zone as a whole, the debt of nonfinancial corporates climbed from around 77% of GDP in 1999 to almost 90% of GDP as soon as 2002 (Chart 1). After a short breather, the debt ratio then leapt above 104% in a second surge between 2006 and 2009, when the economy was booming in countries such as Spain. Private households borrowed increasing amounts of money on the back of the strong economy, high income expectations and rising house prices. Between 1999 and 2009, credit surged from 47% to over 64% of GDP (Chart 2). When the housing bubble burst and the financial crisis broke out, a phase of deleveraging began for companies and private households across the euro zone.
