Executive Summary

Many analysts expect that U.S. real GDP growth will be lackluster over the next few years as consumers’ desire to delever leads to sluggish growth in consumer spending. In contrast, the household debt-to-GDP ratio in the overall Euro-zone does not appear to be overly elevated at present. However, there is a wide range of ratios for individual countries within the Euro area, and three countries have American-like ratios of household indebtedness. In addition, Greece has experienced a sharp rise in consumer indebtedness over the past decade. These four countries have accounted for more than 40 percent of consumer spending growth in the Euro area since 2000, and overall GDP growth in the Euro-zone could be restrained over the next few years if consumers in these economies attempt to raise their saving rates like their German counterparts have done this decade.

On the Surface, Euro-zone Households Are Not Overly Leveraged

When thinking about the trajectory of the U.S. economy over the next few quarters, most analysts expect a slow pace of recovery. According to this consensus view, consumer deleveraging will hold back growth in U.S. consumer spending, which will retard the overall pace of GDP growth. Not only has U.S. household indebtedness trended higher over the past few decades, but the United States has the highest ratio of household liabilities-to-nominal GDP among major economies (Figure 1). Not to be outdone by their former colonists, British consumers have ramped up their borrowing over the past decade, and most analysts look for a relatively sluggish upturn in the United Kingdom as well.1 Not only has the ratio for the Euro-zone risen very little over the past decade, but it is well below the comparable ratios for the American and British economies. Everything else equal, it would seem that growth in consumer spending could be stronger in the Euro area over the next few years than in the United States and the United Kingdom as consumers in the Anglo countries delever.

However, Some Important Euro-zone Countries Have High Leverage Ratios

Much as important regional differences within the United States can be obscured by macro U.S. economic data, economic and financial data for the 16 countries that comprise the Euro-zone can mask country-specific factors. Indeed, household liabilities-to-GDP ratios for specific countries in the Euro area in 2007 ranged from 40 percent in Italy to nearly 120 percent in the Netherlands (Figure 2).2 Moreover, the country-specific breakdown shows why the overall Euro-zone ratio has remained fairly steady over the past decade. Although nine countries experienced rising ratios between 1999 and 2007, household liabilities as a percentage of nominal GDP in Germany, which accounts for about 30 percent of GDP in the entire Euro area, declined over those years, helping to constrain the rise in the Euro-zone average.

There are three countries, namely, the Netherlands, Portugal and Spain, which possess American-like ratios of household liabilities-to-GDP. In addition, Greece has experienced a dramatic rise in its ratio—from 17 percent in 1999 to 55 percent in 2007—over the past decade. Greece’s admission to the Euro-zone in 2001 led to a sharp reduction in interest rates, both at the short-end and long-end of the curve, which contributed to the rapid build-up in consumer borrowing. Because the liabilities of the Greek household sector have changed significantly over the past few years, we have included Greece in our sample of highly geared economies in the Euro area.