Germany’s Secret Credit Addiction

LONDON – With recent data showing that German exports fell 5.8% from July to August, and that industrial production shrank by 4%, it has become clear that the country’s unsustainable credit-fueled expansion is ending. But frugal Germans typically do not see it that way. After all, German household and company debt has fallen as a share of GDP for 15 years, and public debt, too, is now on a downward path. “What credit-fueled expansion?” they might ask.

The answer lies in the reality of our interconnected global economy, which for decades has depended on unsustainable credit growth and now faces a severe debt overhang. Before the 2008 financial crisis hit, the ratio of private credit to GDP grew rapidly in many advanced economies – including the United States, the United Kingdom, and Spain. Those countries also ran current-account deficits, providing the demand that allowed China and Germany to enjoy export-led expansion.

Credit-driven growth enabled some countries to pay down public debt. The ratio of Irish and Spanish public debt to GDP, to cite two examples, fell significantly. But the overall advanced-economy debt/GDP ratio, including public and private debt, grew from 208% in 2001 to 236% by 2008. And total global debt rose from 162% of world GDP to 175%.

Credit growth fueled asset-price increases and further credit growth, in a self-reinforcing cycle that persisted until the bubble burst and confidence collapsed. Faced with falling asset prices, households and companies then attempted to deleverage. The ratio of household debt to GDP in the US has indeed fallen – by 15% since 2009. But the debt did not go away; it simply moved from the private sector to the public sector.