Postponing cuts in public and private sector debts would be “very dangerous” and risk a Japanese-style “lost decade”, Jean-Claude Trichet, European Central Bank president, warned on Friday in Jackson Hole.
Dealing with economic imbalances was not simply a duty to be completed after an economic recovery but “an important precondition for sustaining a durable recovery”, Mr Trichet told central bankers gathered at the US mountain resort.
His speech highlighted rising ECB concern that high levels of government, household or corporate debt could stifle the global recovery. In recent months, Mr Trichet has argued for tightening fiscal policies rather than providing more stimulus. Although he did not single out any country, his comments appeared to be directed at US policymakers and economists.
Some commentators, Mr Trichet said, had proposed to ignore financial imbalances “for the time being” to focus only on the short term, in the hope that more spending would support growth. “I believe that adopting this view would be very dangerous for our economies. There is a very clear example of the consequences of choosing to live with the debt: Japan in the 1990s.”
In Japan, banks contributed to weakness by rolling over the debts of inefficient firms. But Mr Trichet also said economic growth could be threatened by high public indebtedness. “As long as it is unclear when the adjustment will occur and who will bear what fraction of the costs of adjustment, firms and households may delay their investment and consumption decisions, slowing down the economic recovery.”
The global economic crises of the past three years had brought to a halt the rise in private debt, Mr Trichet observed, but fiscal deficits had “shot up to peacetime highs”. As a share of gross domestic product, government debt would by next year have increased by more in the US than in the eurozone overall.
Europe’s postwar economic history showed that large reductions in debt-to-GDP ratios “are not uncommon and quite feasible”, Mr Trichet argued. Fiscal contractions that helped lift economic growth were “not just a theoretical curiosity”.
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