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On July 2^nd, the Economist Intelligence Unit published an article with the above title, and I thought it significant enough to do a post summarizing its conclusions.   Please note that the information I am quoting is contained within the article, but my commentary below does not reflect the opinions of the Economist Intelligence Unit.

It compares the five countries Ireland, the UK, Iceland, and the United States, and Spain with regards to

• Amount of household debt incurred between 2000 and 2007
  
• Policies taken to reduce household debt
  
• Real private consumption growth in the two periods 2008-2011 and 2012-2016 (estimated)
  

On the basis of these comparisons, the article tries to draw some conclusions.   I reach my own conclusions, as you can see below.

1. Amount of household debt

The countries can be ranked as follows in terms of household debt that was racked up during the period from 2000-2007, with the top country (Ireland) having the most household debt and the bottom country (US) having the least.

Ireland

Spain

UK

US

This raises the question of why Iceland, which bucks the trend of the other four countries when it comes to policies taken to reduce household debt (see section 2 below), was not included in these statistics. Did EIU not have access to the data (hard to imagine), or was it that the data didn’t fit with the others in some fashion. There’s probably a good reason for their non-inclusion of the data, but its having been left out does naturally raise questions.

2. Policies taken to reduce household debt (green if successful, red if unsuccessful)

If you look at the various policies either enacted or proposed, the ones in the UK, Spain and Ireland focus on helping the lenders rather than the borrowers. The policy of making bankruptcy an easier process has been a pro-borrower proposal in Ireland, but it is only a proposal at this point which is why I have not listed it above.

The US has a purportedly borrower-friendly home-loan modification program, but this is only on the surface; only a portion of that money has yet been allocated to the home-loan modifications.  The most positive pro-borrower policy that was attempted in the US was the various lawsuits put forward by state attorneys general against the banks for fraudulent practices such as robo-signing, etc. The aim of these lawsuits was to put pressure on the banks to do mortgage write-downs for households in negative equity (the so-called “underwater” loans). However, the attorneys general caved in to political pressure from the White House, and agreed to a preemptive settlement done on the Federal level, presumably so that their states could partake in the proceeds from the settlement.  However, the amount of money paid by the banks in this settlement ended up being essentially a slap on the wrist compared to the amount of liability they face. Even worse, some of those states that did end up receiving money from the settlement in some cases just put in into the general coffer to help balance their own struggling budgets, rather than give the money to the households it was designed for. The households on average would have received only the equivalent of about one-month’s mortgage, but even that insult would have been better than the empty promises they received instead.

The most pro-borrower set of policies has been taken up Iceland, which managed the mortgage write-downs that the US failed to enact.

3. Real private consumption growth

Now, here’s the kicker:

The five countries of this survey can be ranked in terms of estimated real private consumption growth in terms of % for the years 2012-2016:

Conclusion:

Those countries whose policies were the most pro-borrower with regards to the reduction of household debt are the countries with the highest projected consumption growth for the next five years? Coincidence? No. The borrowers who have had their debt reduced in such a way that reduces their mortgage on a permanent basis through a write-down will have more money to spend. And guess what? They most likely will, as opposed to those people in countries where the policies almost uniformly favor the lender under the rubric of “austerity”. An austere lifestyle does not “prime the pump.”

These are, of course, my conclusions, but I think they are pretty well substantiated by the information in the article. Even the EIU, while probably not endorsing my conclusion, would have to agree that the austerity measures proposed in the EU at present are not conducive to economic growth in the short- or medium-term future.

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