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Europe Still Has a Mountain of Debt

As tempting as it may be to ignore conventional wisdom, Mohamed El-Erian says it's too soon for Europe to declare victory over the financial crisis.

By Mohamed El-Erian | Updated on April 23, 2014
Mohamed El-ErianThere was a time not so long ago when the vast majority of experts agreed that a country could not emerge decisively from a financial crisis unless it solved problems of both “stocks” and “flows”—that is, secured a flow of money to cover its immediate needs and found a way to manage its stock of outstanding debt over time.

In Europe today, this conventional wisdom appears to be fading. The temptation there is to declare victory having solved only the flow, not the stock, challenge.

The flow/stock intuition is quite straightforward. In the first instance, a crisis-ridden country must generate enough resources to meet its pressing funding needs, and do so in a manner that does not erode its growth potential. Soon thereafter—or, even better, simultaneously—the country needs to realign its longer-term payment obligations in a manner that is consistent with both its ability and willingness to pay.

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