In Europe, the average country carries debt worth about 95% of GDP.
That national debt must be paid off over time, whereas GDP is just one year’s worth of economic activity. So a 95% debt ratio isn’t that onerous. It’s completely normal, in fact. France and Spain both have about that level of debt.
But there are two countries in the euro zone that are completely abnormal: Greece and Germany. As this chart from Barclays shows, the two countries are at opposite ends of the spectrum when it comes to debt and GDP. Germany’s debt is only 75% of its GDP, but Greece’s debt is nearly 180% of GDP:
The problem here is that the current Greek debt crisis — and the EU refinancing of that debt — is being negotiated by the two countries that have the least-normal view of what an economy can reasonably expect in terms of debt. The Germans pay their debts easily and cannot understand why the lazy Greeks shouldn’t do the same. The Greeks believe their debt is crippling the country’s ability to generate the economic activity that might lead to normal debt repayments, and cannot understand why the Germans can’t see that too.
Interestingly, Germany is becoming more isolated in its view that the Greeks must pay their debts in full, no matter how impossible the numbers suggest that is. The National Institute of Economic and Social Research (NIESR) just said Greece should get 95 billion euros in debt relief (not just extra credit on new terms). The IMF, which previously supplied Greece with credit, says it will not offer further debt to Greece unless some of the debt is forgiven.
That leaves the Germans, who until now have insisted that no debt can be written off, even though — without the IMF on board — more of Germany’s own money is at risk on a country with a demonstrated history of defaulting.
Good luck with that, chancellor Merkel.
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