Working paper

The debt challenge in Europe

The euro area faces a double challenge: debt overhang and the need for price adjustment. This paper reviews the debt challenges in the household and c

Publishing date
31 January 2012

The euro area faces a double challenge: debt overhang and the need for price adjustment. This paper reviews the debt challenges in the household and corporate sectors and maps out some policy options. In particular, we document the increase in private debt prior to the crisis and consider how the corporate and household sectors have adjusted their balance sheets during the crisis.

We examine previous experiences with corporate and household deleveraging and draw lessons for policymakers. We show how the macroeconomic effects of balance-sheet adjustments have been in part offset by the use of fiscal deficits, and we discuss the resulting challenges. A key lesson is the importance of maintaining economic growth and avoiding a prolonged doubledip recession in the euro area while facilitating necessary deleveraging in some over-indebted sectors and countries. We also emphasise the need for a growth strategy tailored to southern Europe.

About the authors

  • Alan Ahearne

    Alan Ahearne is a Professor and the Head of Economics at the National University of Ireland, Galway. He is a member of the Board of the Central Bank of Ireland and has served as adviser to the IMF. He is Chairman of the ESRI and Department of Finance Joint Research Programme on the Macro-economy and Taxation.

    Alan served as economic adviser to Ireland’s former Minister for Finance Brian Lenihan from 2009 to 2011.

    Alan obtained his PhD from Carnegie Mellon University (in Pittsburgh) in 1998 and subsequently joined the Federal Reserve Board in Washington, where he worked as a Senior Economist for seven years.

    His research at Bruegel has focused on macroeconomics, international finance and public policy, including macroeconomic adjustment in the euro area, reform of the euro area and governance of the EU, global current account imbalances, housing booms and busts, and the international experience with banking and financial crises.

  • Guntram B. Wolff

    Guntram Wolff was the Director of Bruegel. Over his career, he has contributed to research on European political economy and governance, fiscal, monetary and financial policy, climate change and geoeconomics. Under his leadership, Bruegel has been regularly ranked among the top global think tanks and has grown in influence and impact with a team of now almost 40 recognized scholars and around 65 total staff. Bruegel is also recognized for its outstanding transparency.

    A recognized thought leader and academic, he regularly testifies at the European Finance Ministers' ECOFIN meeting, the European Parliament, the German Parliament (Bundestag) and the French Parliament (Assemblée Nationale). From 2012-16, he was a member of the French prime minister's Conseil d'Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed to the G20 high level independent panel on pandemic prevention, preparedness and response. He is also a professor (part-time) at the Solvay Brussels School of Université Libre de Bruxelles, where he teaches economics of European integration.

    He joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he was coordinating the research team on fiscal policy at Deutsche Bundesbank. He also worked as an external adviser to the International Monetary Fund.

    He holds a PhD in economics from the University of Bonn and studied in Bonn, Toulouse, Pittsburgh and Passau. He taught economics at the University of Pittsburgh and at Université libre de Bruxelles. He has published numerous papers in leading academic journals. His columns and policy work are published and cited in leading international media and policy outlets. Guntram is fluent in German, English, French and has good notions of Bulgarian and Spanish.

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Comment

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