Hamish McRae: Debt is a world problem, not just a Greek one

It is time to start thinking beyond Greece.

Talks were continuing in Brussels, spurred by pressure from the US and Canada at the Group of Seven summit in Bavaria which was winding up today.

But in the broader scheme of things, Greece is a distraction. The real story is the world economy, recovering to be sure but only thanks to policies that are unsustainable: near-zero interest rates and shedloads of money printed by the world’s central banks.

Some perspective: economic summits go back almost 40 years to when the leaders of the then largest six economies — the US, Japan, Germany, France, the UK and Italy — were invited by the French president Valéry Giscard d’Estaing, to the Château de Rambouillet just outside Paris in November 1975.

The purpose was to discuss how they might pull together to help the world economy recover from the oil shock of 1973-74. Canada, and then Russia, joined later to become the G8.

Now, thanks to the misbehaviour of President Vladimir Putin, we are back to a G7. Russia, never naturally a member, has been excluded.

Though the G7 no longer reflects economic might — China is now the world's number two economy — the leaders do have to confront a comparable threat to that of 1975.

Then it was the surging oil price and the threat of runaway inflation. Now it is a developed world overburdened with debts that threaten to undermine the recovery.

The disadvantages of the ultra-easy monetary policies that have fuelled the recovery are more and more evident, particularly their impact on wealth inequality within the developed world.

People and institutions that own assets have seen their value soar: the German stock market is up 20% since the European Central Bank started its quantitative easing programme late last year.

But those who own few assets have been left behind, with the social tensions that such exclusion generates. Protesters in Munich in the past few days have a point, though I doubt many of them have thought through the link between QE and inequality. Yet were policy to be tightened and interest rates to go up sharply, that might kill the recovery.

Why, then, do the difficulties of Greece, which accounts for about 0.3% of the world economy, loom so large? The obvious answer is that it exemplifies in extreme form the stresses created by having a single European currency. This is what happens when political expediency trumps economic common sense.

Less obvious and more alarming is the extent to which debt overburdens the entire world economy. Greece is the extreme example of that. We all know about what has happened here, with the national debt still rising both in absolute terms and relative to GDP.

But while the details differ, the same broad pattern applies to almost every major developed economy. It also applies to China. Of the large economies, only Germany is running a budget surplus, and even that country faces a daunting problem: servicing its debts with a declining workforce to pay both for these debts and for its rising ranks of retirees.

Similar pressures apply at an individual level, for although families in some countries (including the UK) have started to pay down their debts, in others there has been very little personal deleveraging.

After all, with money sprayed around at near-zero rates by mortgage-lenders, why wouldn’t you borrow more, and pay more, for a bigger house — or a house at all?

Too-easy money encourages people to make bad investment decisions, just as too-easy money encouraged Greece to do so when it managed to scramble into the eurozone.