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Prosperity based on debt
A large number of European governments were keen to embark on the deregulation of the financial sector in the 1980s. The deregulation in Europe was initially proposed in the United Kingdom by the Prime Minister Margaret Thatcher and, subsequently, adopted by a large number of European governments.
It opened up the doors to the addiction of European consumers to credit. Waves of bank loans and mortgages became available to consumers and it quickly turned into a necessity. Later on, it became clear that banking in Europe turned into a highly profitable activity completely different from the risk-averse methods adopted by the sector in the 1970s.
This practice generated the conditions for household debt to rise to a greater proportion of real income. The expansion of household debt in the 1980s, 1990s and 2000s was unprecedented by any historical standards and the whole economic system became dependent on debt creation to expand further.
Following more than three decades of financial deregulation, the outstanding credit to households in Europe 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, for example, 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.
This large-scale lending, which was backed by government policies, aimed to incentivise European consumers to increase 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 increase in borrowing rates coincided with the stagnation of wages across Europe.
How much more would it need to grow before someone in the government realizes that there is something wrong with it?