Bloomberg
May 17, 2012
One by one, European nations are letting their voices be heard, tossing out the party in power and voting in those who, in some cases, have a more radical agenda or, in others, are just willing to say “no” to the status quo. A bas l’austerite! Down with austerity! Up with growth!
If only it were that simple. That’s how the trade-off is being portrayed, and perhaps that’s what policy makers pushing the idea, and individuals on the receiving end, want to believe. With many euro-zone countries in recession, one can understand the appeal. Spend more, grow more and presto! The debt shrinks in relation to the economy and becomes more manageable.
“Wishful thinking,” said Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics in Washington, who knows a thing or two about debt. “You seldom grow your way out of debt. The historic experience is very rare.”
Reinhart, along with husband Vincent R. Reinhart, chief U.S. economist at Morgan Stanley, and Harvard University economist Kenneth Rogoff offer some sobering advice for the struggling euro countries, as well as other nations, in an April working paper, “Debt Overhangs: Past and Present.”
To summarize the major findings: Forget about growing your way out of debt. Too much debt depresses growth, often for as long as two decades. Debt isn’t solely a cyclical phenomenon. Real interest rates may be as low during debt overhangs as they were before.
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