Private Debt Will Likely Weigh on Growth for Years

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Public debt has received most of the spotlight since the European debt crisis flared up more than two years ago. But private-sector debt is arguably a more intractable problem, and governments, particularly in the euro zone, appear unlikely to embrace bold policies that would ease its burden on the European economy, The Wall Street Journal Brussels Beat blog reported. The origin of the private-debt problem is mortgages: Real-estate prices soared in a number of European countries, and banks were willing to lend ever-larger sums for home purchases. The real-estate boom has since hit the rocks throughout much of Europe, but mortgage debt endures as an albatross hanging around the necks of European consumers. Economists have found a strong link between consumption, credit booms and falling real-estate prices: Countries that experienced a sharp rise in household debt will experience a sharper fall in consumption after a housing bust than nations where debt hasn't risen as fast. If you borrowed a lot of money to buy your house (and the land it rests on), and then prices fall soon afterwards, you are more likely to want to repay the debt than go out to dinner, buy a new car or renovate your house. Those decisions, multiplied throughout the economy, are dragging on European nations, such as the Netherlands, Denmark and the U.K., that lived through a credit boom. Read more. (Subscription required.)