The Europeans have barely begun to deleverage. In Spain and Ireland the process has at least started. But it will take years, maybe decades, until it is completed. Atif Mian and Amir Sufi write that the pattern between debt accumulation and subsequent contraction in consumption for Europe is remarkably similar to what we document for the United States. One can simply replace European countries with states or cities within the United States and get the same picture. Adair Turner writes that the prevailing view has usually stressed supply constraints and the policies needed to fix them.
The policy focus remains on fixing the credit-supply problem, through the AQR and stress tests, and through the ECB’s own version of a funding for lending scheme, announced on June 5. An impaired banking system, it is argued, starves businesses, particularly small and medium-size enterprises (SMEs), of the funds they need to expand. But for SMEs, a shortage of customers, not a shortage of credit, constrained borrowing, employment, and output. And the customers were absent because the pre-crisis credit boom had left them over-leveraged.