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A new dynamism for major European economies
The expansion of household debt in Europe in the 1980s, 1990s and 2000s was unprecedented by historical standards and the economic growth of European countries has become partially dependent on it.
The numbers from the Bank of International Settlements (BIS) and Marketline analysis reveal that the outstanding credit from the banking system to European households increased more than 170%, in nominal values, from US$4tn in 1995 to more than US$ 11tn by the end of the 2000s. In the UK alone, household debt is running at US$2.4tn which represents an increase of more than 200% since the middle of the 1990s. Domestic banks are the main providers of credit to all sectors of the economy including households.
The creation of an indebted middle and lower classes has kept wages under control and, at the same time, has increased the levels of consumerism. This large-scale lending, backed by government policies, has been aimed to incentivise European consumers to increase their borrowing rates. This practice has boosted the profitability of the European banks on an unimaginable scale. It has generated a permanent stream of cash flowing from consumers to the banking system based on the acquisition of mortgages and consumer credit to purchase durable and nondurable goods.
The pile of debt helped to fund the architectural transformation of the financial centres in major European cities such as Paris, London and Berlin and it has allowed the richest segments of the society to extract large sums of money from other newly “debt dependent” social classes.
Additionally, the economic growth of the service and manufacturing sectors became dependent on the debt expansion. A preliminary statistical analysis, undertaken by Marketline analysts, indicates that an expansion in consumer debt increases the manufacturing output in Europe. In the United States, our similar analysis indicates that a 1.0% expansion in consumer credit increases the manufacturing output by 0.28%. It clearly shows that the credit addiction is partially responsible for driving up the manufacturing production within the country.
The new dynamism of the European economy should come from real wage gains and much lower levels of consumer debt. The creation of an indebted middle and lower class is only beneficial to the banking system.
High consumer debt accumulation is detrimental to the economic growth of European economies because it generates a great deal of instability over future debt repayment, concentrates large sums of money on the hands of the richest segments of the society and, finally, artificially increases the levels of consumerism even if real wages are falling. None of this will help to drag the European economy out of low growth, deflation and austerity.
MarketLine publishes a number of industry profiles outlining the performance of manufacturing sectors in Europe. MarketLine subscribers can access our industry profiles here, or non-subscribers can purchase them here.