Bank Austria’s Stefan Bruckbauer sees a way out of the crisis

The chief economist of Bank Austria proposes an “easy”, though painful, solution to Europe’s debt mess.

The EU is currently engaged in an almost endless series of summits to create a long-term solution for Greece, as well a plan to ring-fence the banking system and the eurozone’s bigger peripheral countries. So it seems odd for an economist to propose an “easy” solution to the mess.

But for Stefan Bruckbauer, that solution might be quite straightforward. The chief economist of Bank Austria stresses that one cannot grasp the problem of the debt crisis without taking a bird’s eye view.

“Look at the balance sheet of the eurozone. We see huge debts on the side of governments and corporations and a big surplus on the side of private households,” he said during InvestmentEurope’s Fund Selector Forum Austria.

To be able to move the debt mountains on the side of governments, savers might see the value of their ­holdings shrink. With €12.2trn in net assets on the side of ­households, there should be room to absorb real losses on the €6.2trn in eurozone government debt. But the ­proposal is as painful for investors as it is simple.
“Governments can only get out of their debt if the holders of government debt get no real interest rate on their bonds,” Bruckbauer said.

Financial repression

The phrase “financial repression”, popularised by US scholar Carmen Reinhart, springs to mind. The senior fellow at the Peterson Institute for International ­Economics argued in a paper for the International ­Monetary Fund in May, The Liquidation of Government Debt, that governments were only able to get out the post-war debt through negative real interest rates over 20 years.

“We are not talking about hyperinflation here,” ­Bruckbauer told the fund selectors and ­portfolio managers listening to his keynote address at the Austria Forum. “Even inflation rates of four to five per cent would do the trick over ten to 20 years.”

The economist’s medicine also needs a disciplined patient, not only lower private savings. If governments started to balance their budgets and the European Central Bank keeps interest rates on long-term bonds low, even moderate nominal growth (real expansion plus inflation) might help to pay off debts quickly.

Public debt in advanced economies – today at the ­staggering level equal to economic output – could thus fall to below 90% of GDP by 2020, with an annual deficit of 2% and nominal growth of roughly 4%.

This notion does not sound completely preposterous. According to the IMF, annual nominal growth in advanced economies averaged 3.3% over the past ten years, despite the most severe recession since the Second World War.

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