In my December 2010 report on the dynamics of Debt etc, I stated that it would be extremely difficult to reduce debt by debt reduction and that the only way to bring down debt realistically was to rely on nominal growth. The only problem is that a) large amounts of debt have been built up in unproductive assets which will act as a drag on growth going forward and b) with limited increases in debt, for a number of reasons, potential growth going forward on potentially more productive assets could be limited.
The UK economy has had the benefit of a flexible exchange rate (which the individual Euro Zone economies do not) and a central bank that has been able to a) monetize debt and b) effectively finance government expenditure through bond purchases in the secondary market, which Euro Zone economies have not.
Yet, the UK is in danger of missing its budget deficit reduction forecasts amidst weak economic growth.
Why is this a concern? Well, it is not a surprise to some, but since many of the more bullish views of the direction of markets and economies depend on the transformation of the ECB into a lender of last resort, it should be a reminder that this may not be the panacea it is expected to be. Additionally, the UK has not attempted to reduce its government debt, only to reduce the amount it borrows each year.