Don’t Blame Debt For The Eurozone’s Recession

With Europe tilting back into recession it’s worth emphasizing that though this is clearly tied up with the sovereign debt issue, it makes no sense to say that the recession is caused by excessive debts. What it means for a country’s debts to be excessive is that the stock of money it’s borrowed is disproportionate to the amount of output it’s undertaken. That might force you to do unpleasant things to boost output. Work longer hours without seeing higher pay. Retire later. Work just as hard for the same salary, but reduce your consumption of goods and services.Think of all the things that you, personally, might do if it suddenly turned out that you needed to hand several thousand dollars over to a German bank.

It would be an unpleasant situation. But you would by no means deliberately set about to make yourself unemployed. And yet that’s a recession. It’s the opposite of taking painful measures to increase output. It’s the reverse of pulling more people into the paid labor force. “Don’t get deep into debt, or you might be forced to stop working altogether in the future” doesn’t make any sense as a warning. What you’re looking at when you see this recession is a total bungling of the situation. Europe’s economies needed stimulus + reform to maximize output and pay down debts. Instead they’re getting reform backed with the lash of austerity, which is only burying them deeper in debt.