Suppose that the euro zone economy was exactly the same as it is now, except that the ratio of sovereign debt to GDP was nine per cent instead of 92 per cent. In that alternative reality, recent economic data would be depressing, but not worrying.
Yes, Italy has structural problems, exemplified by the 0.2 per cent quarterly decline in GDP and the nine per cent fall since its 2008 peak. Yes, the German recovery seems to have stalled, with a 1.5 per cent decline in industrial production between the first and second quarters. And it is hardly a sign of strength that the whole euro zone's GDP is still three per cent below the peak.
Investors are upset at the slow growth, but for its residents, most of the euro zone remains a prosperous and secure place to live. Stagnant GDP is far from disastrous, especially considering the very slow increase in population. Residents should be much more upset about the 11.5 per cent unemployment rate. When GDP was last at the current level, in 2007, the rate was 7.5 per cent.
The authorities and the markets would be equally unperturbed by the 0.5 per cent inflation rate. Price stability is not necessarily a bad thing if there are few debts to worry about.
But there are debts, so the current mix of low inflation, slow growth and borrowing governments is financially toxic. For all the talk of euro zone austerity, the government debt load has steadily increased, by seven percentage points of GDP between 2010 and 2013, with another small addition certain this year.
Debt pressure could easily tip the euro zone into another crisis. Interest rates are low and the ECB is doing what it can to help, but an otherwise not-too-ill region could be suffocated by its governments' debts.
Yes, Italy has structural problems, exemplified by the 0.2 per cent quarterly decline in GDP and the nine per cent fall since its 2008 peak. Yes, the German recovery seems to have stalled, with a 1.5 per cent decline in industrial production between the first and second quarters. And it is hardly a sign of strength that the whole euro zone's GDP is still three per cent below the peak.
Investors are upset at the slow growth, but for its residents, most of the euro zone remains a prosperous and secure place to live. Stagnant GDP is far from disastrous, especially considering the very slow increase in population. Residents should be much more upset about the 11.5 per cent unemployment rate. When GDP was last at the current level, in 2007, the rate was 7.5 per cent.
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In a low-debt alternative world, euro zone governments would be able to borrow to fund job creation programmes. In that happy place, the European Central Bank and bond investors would not mind, since the additional borrowing would not threaten solvency, even if the programmes did not lead to higher tax revenues.
The authorities and the markets would be equally unperturbed by the 0.5 per cent inflation rate. Price stability is not necessarily a bad thing if there are few debts to worry about.
But there are debts, so the current mix of low inflation, slow growth and borrowing governments is financially toxic. For all the talk of euro zone austerity, the government debt load has steadily increased, by seven percentage points of GDP between 2010 and 2013, with another small addition certain this year.
Debt pressure could easily tip the euro zone into another crisis. Interest rates are low and the ECB is doing what it can to help, but an otherwise not-too-ill region could be suffocated by its governments' debts.