Sisyphus and the European Debt
New data on the sovereign debt situation in Europe was released today and, as noted in this story at the New York Times from which the graphic below was culled, it appears that policymakers are having about as much success in reducing their debt-to-GDP ratios as Sisyphus had in getting a boulder to stay atop the hill he kept pushing it up (for those not bothering to click the link, the boulder kept rolling back down).
In short, reducing government spending to close budget gaps has had an adverse impact on economic growth, so, traditional debt-to-GDP ratios have been rising as budget deficits shrink. All told, the debt of the 17 eurozone nations rose to a new record high of 90 percent of GDP in the second quarter, up from 88.2 percent in the first quarter, prompting many economists (including those at the IMF who recently did an about-face on this subject) to conclude that slashing government spending might not be the best approach.
Of course, others argue that there are no good solutions to Europe’s debt troubles given where they started out when the sovereign debt crisis began in 2009 and this is particularly true for a country like Greece, where, just a few years ago, government spending accounted for nearly 50 percent of economic output.
The words of GMO’s Jeremy Grantham are applicable here as, when asked how he’d remedy the world’s economic ills, he famously said some time ago, “Well, I wouldn’t start from here”.