Paying Europe’s Debts

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Richard Oldfield

Hello and welcome to this brief video discussing our brand new report Paying Europe's Debts. It’s a topic that’s in the news daily and in fact has been in the news pretty much for the last few years. I was with a client this morning who actively talked to me about the impact that debt was having on their business.

I am joined today by two of our experts from the economics team, John Hawksworth and Jonathan Gillam.

Now John, what are the key points coming out of this report?

John Hawksworth

The first point as you say is that debts have risen greatly in recent years, and indeed the last couple of decades, across Europe. Just on the government side which has got a lot of attention we estimate that total EU debt is now more than €10 trillion, which is more than €21,000 per person across Europe. So it is a huge debt mountain. But also there are many debt issues on the private sector side: corporations and households also seeing rising debt and this varies a lot by country.

In some countries like Greece, Portugal, Italy it really is a public sector problem. In other countries like UK, Spain and Ireland it’s more of a private sector problem: when the property bubble burst the associated debt has rebounded on the government through lower tax revenues and the cost of bailing out some of the affected banks. And there are some countries like Germany that have been relatively unaffected and have relatively sound public finances, but are now also facing the cost of bailing out countries like Greece and Spain. So it is a mixed picture and we try and paint that picture in some detail in the report.

Richard Oldfield

So we hear an awful lot about countries having to borrow more and debt levels going up. Is anyone paying any of their debt back?

John Hawksworth

They are actually, I think the evidence shows that some companies are improving their balance sheet positions over the last few years and are actually quite cash positive now, and some households as well have been quite cautious in recent years and increased their savings.

For governments I think it is more a matter of recently trying to stop debt going up so fast, reduce the dynamics of it. And of course there are austerity programmes coming therefore in terms of tax rises and spending cuts which have only just begun in many countries and which will have quite important business implications that we look at in some detail in this report.

Richard Oldfield

You mentioned the private sector and perhaps I can come to Jonathan. Can you give us a view on what's happening with consumers?

Jonathan Gillham

I think the consumer picture varies significantly by country if you take the UK for example, it has got a very high share of household consumption in its GDP. Consumers are often quite indebted so when uncertainty starts to emerge in the economy consumers become quite cautious in their spending patterns and some of them are already starting to unwind their debt positions, they are starting to save more. That has quite substantive implications for businesses because they will find it harder to sell their products to people who basically are trying to save on money.

Richard Oldfield

So you say it has a big knock-on to impact companies. What is happening in company balance sheets?

Jonathan Gillham

I think again it varies significantly. Businesses have got relatively strong balance sheets coming out of the recession because largely they haven't had anywhere to invest their money. So some of them are sitting on quite large cash reserves, but underlying that there are some quite substantive problems. Firstly, businesses that do want to grow may find it difficult to borrow money because the financial sector has been under a considerable amount of stress for a fairly sustained period and is having difficulties retaining the amount of cash reserves it needs to function and hence to lend to businesses. Secondly, if consumer expenditure growth does start to slow again, then we might start to see some businesses being hit quite hard by this - but again that varies by market and by region.

Richard Oldfield

So it is a pretty complicated and mixed picture. So John perhaps you can give us what are the takeaways, the important points from this report?

John Hawksworth

I think for businesses it is to get used to a ‘new normal’ in which growth is going to be relatively modest and volatile in Europe even if there are some great opportunities in emerging markets elsewhere in the world. So I think that looking after your cash position particularly is very important - cash is king in this kind of environment - looking after your working capital, making sure that you are running a tight business that is focused on your real areas of core strength.

Richard Oldfield

Jonathan, anything to add to that?

Jonathan Gillham

Yes I think what businesses really should be looking out for are the different policy measures that are going to be levied on them by governments. So, for example, a lot of governments are going to put up taxes to help pay down their debts. The different tax strategies that governments are putting in place vary significantly: some countries are very focused on VAT and other consumption taxes, other countries are focused much more on business taxes. Each of those will impact on businesses in different ways and on markets as well.

Richard Oldfield

Thank you very much. Clearly this is a really important topic, not only for governments but for businesses particularly those that operate throughout Europe. What I hope the report gives you is a good insight into the issues that you should be thinking about around debt in Europe.

Enjoy reading the report, it is a really easy read and thank you for listening.

This report highlights the high level of debt that has built up around Europe, including the UK, in recent years. It discusses the economic and business implications of these high public and private debt levels and the way that deleveraging by governments, households, banks and companies may interact.

The key points from the report are that:

  1. Total EU government debt has now risen above 10 trillion euros, equivalent to around 21,000 euros per person. At a time of slow growth and steadily ageing populations, this is a major concern.[Click to view infographic]
  2. Governments have started to implement austerity programmes to address these high debt levels, but the scale and impact of these measures varies significantly by country. Businesses operating across different EU countries need to understand these differences and our economic modelling tools can help with this task.
  3. The UK does not have the worst public debt position but it is particularly exposed to possible household deleveraging (more so than any other EU country than Greece according to our analysis). Since the Eurozone crisis is limiting UK export growth, much will depend on the strength of the UK consumer going forward.