Sovereign debt crises in the EU


in Bombs and rockets, Economics, Law, Politics, Rants, Security

I find all the economic anxiety in the European Union (EU) to be rather worrisome, from a long-term historical perspective. I think the last 500 years of history demonstrate pretty convincingly that the most benign possible way for European states to spend their time is arguing over agricultural subsidies and cheese standards. It’s definitely a lot more congenial than building tanks and smashing through Poland and Belgium over and over.

As such, I rather hope the EU is able to sort things out and set up systems that prevent these problems in the future. There definitely need to be ways in which the actions of less responsible governments can be prevented from requiring frequent bailouts from more responsible governments, but I don’t think the risk of that happening from time to time is so severe that it is worth derailing the whole European project over.

{ 14 comments… read them below or add one }

oleh December 19, 2010 at 12:31 pm

Born in 1957, I grew up in a world when the outbreak of World War III was more a question of when rather than if. I am pleased that we are now more talking about if. The European Union has contributed to that peace.

Milan December 19, 2010 at 8:07 pm

Of course, it isn’t necessarily the case that the failure of the EU would lead to renewed conflict in Europe. Still, the current arrangement in Europe seems highly preferable to any other political arrangement in the history of the continent.

Indeed, we might aspire to eventually having an entire planet as peaceful and rule-bound as Europe is now.

R.K. December 21, 2010 at 12:58 pm

The Euro and even the EU could fail without recreating the risk of war in Europe.

. December 22, 2010 at 5:30 pm

BBC 20th Dec 2010
Gavin Hewitt
A bleak year in Europe

The main motivation behind these changes is to defend the euro – at least for those countries that use the single currency. Greece and Ireland have been put on austerity rations in exchange for a bail-out. Other countries are casting social programmes overboard in the hope of taming the bond markets. But here is the strange thing. Few people believe the medicine will work. Where will these countries find the growth from to repay the loans let alone their debts? Will countries like Spain be able to raise the money they need next year just to service their debt?

. January 8, 2011 at 6:33 pm

Fighting fire with fire
Unless it is a lot bolder, the euro zone risks being overwhelmed by the markets

IT WAS the Great Fire of 1666 that prompted the establishment of London’s modern fire brigade, organised at first by private insurers, but later coming under public management. In Paris, on the initiative of Louis XV, the pompiers have been fighting fires since 1733. Few Europeans today could imagine a city without a public firefighting service, or a home without fire insurance. But when the architects of the single currency built the euro, they thought that sharing the risk of disaster might merely encourage recklessness and even arson. Better than this moral hazard was to make each country master of its own fate. Why should those living in brick houses save the feckless in their wooden huts?

Now that a great financial blaze has taken hold, the euro zone is facing its 1666 moment. Unless tamed, the conflagration might not spare anybody. The interconnectedness of Europe’s banks (see article), encouraged by the single currency, is acting as a combustible channel for flames to travel from building to building. Greece and Ireland have already gone up in smoke. The flames are licking at Portugal and Spain; Italy and Belgium worry that they might be consumed too. Despite the cries for help, Germany, the great lord in town, does not want to spend more treasure saving its neighbours. Yet even German bond yields are starting to rise.

“We have to stop the bush fires turning into a Europe-wide forest fire,” declares Olli Rehn, the European Union’s economics commissioner. Prevarication makes matters worse. The euro zone’s actions have been hesitant and haphazard. It belatedly improvised to contain the blaze in Greece this spring and then put together €750 billion ($980 billion) in bail-out funds, now being drawn on for Ireland. The EU urges all to protect themselves by cutting budget deficits. It plans closer scrutiny of national budgets and economic policies, and tougher sanctions for miscreants. Yet a better fire code in future may not quench today’s fire.

. January 8, 2011 at 6:40 pm

The last idealists
Europe’s banks are built for a single currency zone. What happens if parts of it default or leave?

THE European project’s greatest fans are supposed to be war-scarred visionaries and remote sheep farmers keen on new roads being built to their front gates. But the truest believers of all have been banks. Over the past decade they have expanded across a continent they thought was becoming indivisible. Their faith has meant that cross-border bets within the euro zone were far more aggressive than elsewhere.

Should a country default or abandon the euro for a new, cheaper currency, it would destabilise banks in other euro-zone countries. Even if the risk of an immediate blow-up is low, the new reality of a currency area in which the risk of default varies from country to country means banks must rethink their approach.

A sense of Europe’s destiny was not the only influence on banks. Capital rules were also important, points out Simon Samuels, an analyst at Barclays Capital. Banks did not (and still do not) need to carry buffers against the government bonds of a euro-zone country, be it Germany or Greece. And since any country’s assets can be used as collateral when borrowing from the European Central Bank (ECB), and all countries are supposedly irrevocably tied to the same currency, the old rule that a bank’s assets and liabilities in a country should roughly match was discarded. Banks could gather deposits from thrifty Germans and lend them out to fast-living consumers and companies on Europe’s periphery. That appeared to involve taking credit risk, but not currency or country risk.

R.K. January 24, 2011 at 9:17 pm

How scary are the ongoing problems in the European Union? What if Greece and company don’t default and that causes a wider crisis?

To what extent has the progression toward European integration been responsible for peace, tolerance, and good government in Europe since 1945?

. March 18, 2011 at 11:39 pm

The euro area’s debt crisis
Sovereign remedies
The “grand bargain” may prove less grand in reality than in rhetoric

Mar 3rd 2011 | from the print edition

FOR months now European leaders have been striving to get on top of the euro-area debt crisis. But as the deadline for a supposedly comprehensive and enduring solution nears—summits are due to be held on March 11th and March 24th—the “grand bargain” is looking ever less grand. A disappointing outcome will fuel market doubts about the fiscal sustainability of the most troubled euro-area economies. Those doubts remain intense. Ten-year bond yields are sky-high for Greece and Ireland, despite the bail-outs of 2010; at an intolerable level for Portugal, generally seen as next in line for a rescue; and still worryingly high for Spain (see chart).

This being a sovereign-debt crisis, politics has a habit of upsetting the tidy reckonings of market spreadsheets. The Irish election on February 25th may have delivered the predicted outcome in the shape of a new ruling coalition dominated by Fine Gael. But it also injects fresh uncertainty since Enda Kenny, the new Irish leader, has a popular mandate to revisit some of the terms of the bail-out in November. The outcome of his negotiations—chiefly with Germany, the euro area’s reluctant paymaster—will in turn help shape a permanent debt-restructuring mechanism that will replace the European Financial Stability Facility (EFSF) when the interim rescue arrangements expire in mid-2013.

. April 7, 2011 at 10:38 pm

The euro zone’s periphery
They’re bust. Admit it.
Greece, Ireland and Portugal should restructure their debts now.

IT IS a measure of European politicians’ capacity for self-delusion that Angela Merkel, Germany’s chancellor, called the euro-zone summit on March 24th-25th a “big step forward” in solving the region’s debt crisis. Something between a fudge and a failure would be more accurate. The leaders fell short on almost every task they set themselves. They agreed on a “permanent” rescue mechanism to be introduced in 2013, but couldn’t fund it properly, because Mrs Merkel refused to put up money her finance minister had pledged. The Brussels gathering did little to help Greece, Ireland and Portugal, the zone’s most troubled economies. Their situation is getting worse—and Europe’s leaders bear much of the blame.

Portugal’s prime minister resigned on March 23rd after failing to win support for the fourth austerity package in a year. The country’s credit rating was slashed to near-junk status on March 29th, while ten-year bond yields have risen above 8% as investors fear Portugal will have to turn to the European Union and the IMF for loans. The economies of both Greece and Ireland, Europe’s two “rescued” countries, are shrinking faster than expected, and bond yields, at almost 13% for Greece and over 10% for Ireland, remain stubbornly high. Investors plainly don’t believe the rescues will work.

. June 27, 2011 at 11:12 am

Europe’s debt crisis has brought the region to the brink of an “economic collapse,” George Soros warns, and it’s likely the monetary union will at some point agree to a plan by which some of its members can leave.

“We are on the verge of an economic collapse which starts, let’s say, in Greece, but it could easily spread,” the renowned investor said at a panel discussion in Vienna yesterday, according to Bloomberg News. “The financial system remains extremely vulnerable.”

This week marks either the beginning of the end for Greece’s troubles, or the beginning of the end for Greece. Whatever happens, though, the debt crisis in the euro zone is far from over.

. July 6, 2011 at 9:24 pm

The euro crisis
A second wave
The bail-out strategy that rescued Europe’s peripheral economies is proving insufficient. This threatens the whole project of European integration

EUROPE’S year-long attempt to grapple with the sovereign-debt crisis is becoming more nailbiting by the day. For weeks European leaders have been feuding over what to do about Greece, which clearly needs more help with its precarious public finances. But a second rescue, adding even more funding to the original bail-out in May 2010, cannot work unless the Greeks push through more painful reforms. These are now in doubt, sending tremors through financial markets and causing stockmarkets to fall around the world.

From the nation that coined the word drama, there was plenty of it on June 15th. As a general strike took hold across the country, there were violent protests in central Athens, where tens of thousands of people had rallied. After failing to form a government of national unity, George Papandreou, the prime minister, announced that he would reshuffle his cabinet and later call a vote of confidence in parliament. The indignation of the protesters is widely shared. A recent poll published by Kathimerini, a newspaper, found that 87% of the public thought the country was heading in the wrong direction.

The same could be said for Europe’s approach to the sovereign-debt crisis, as it has spread relentlessly round the southern and western periphery of the euro area. The single-currency zone as a whole is doing well, outgrowing both America and Britain in the first three months of this year. The euro-wide budget deficit also compares favourably with that of other big advanced countries. But the debt crisis is proving intractable, partly because leading policymakers disagree about the way forward and at times seem lost themselves. Time is short. There is a summit of European leaders next week, and Greece must soon pass an austerity budget.

. July 30, 2011 at 12:03 pm

SIR – Say what you will about Italy. I’ll lodge within the stone walls of a Tuscan villa built in 1166, sip Brunello by its pool to the bells of an 8th-century abbey, dine on pecorino cheese and pici pasta with a funghi e ricotta sauce, eat quail in the Etruscan vault of Osteria da Divo in Siena, drink my espresso on the Piazza del Popolo in Montalcino, or just soak in the red carpets of the Tuscan poppy fields. You can worry about the rest.

Edmund Adams
Cincinnati, Ohio

SIR – I refer you to some apt lines uttered by Orson Welles in “The Third Man”: “In Italy for 30 years under the Borgias they had warfare, terror, murder, and bloodshed, but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland they had brotherly love, they had 500 years of democracy and peace, and what did that produce? The cuckoo clock.”

Mathias Koenig-Archibugi

. August 5, 2011 at 3:54 pm

FOR more than a year the euro zone’s debt drama has lurched from one nail-biting scene to another. First Greece took centre stage; then Ireland; then Portugal; then Greece again. Each time European policymakers reacted similarly: with denial and dithering, followed at the eleventh hour with a half-baked rescue plan to buy time.

This week the shortcomings of this muddling-through were laid bare (see article). Financial markets turned on Italy, the euro zone’s third-biggest economy, with alarming speed. Yields on ten-year Italian bonds jumped by almost a percentage point in two trading days: on July 12th they breached 6%, their highest since the euro was created. The Milan stockmarket slumped to its lowest in two years. Though bond yields subsequently fell back, the debt crisis has clearly entered a new phase. No longer confined to the small peripheral economies of Greece, Ireland and Portugal, it has hurdled over Spain, supposedly next in line, and reached one of the euro zone’s giants. All its members, but especially Germany, face a stark choice.

Consider the stakes. Italy has the biggest sovereign-debt market in Europe and the third-biggest in the world. It has €1.9 trillion ($2.6 trillion) of sovereign debt outstanding, 120% of its GDP, three times as much as Greece, Ireland and Portugal combined—and far more than the €250 billion or so left in the European Financial Stability Facility (EFSF), the currency club’s rescue kitty. Default would have calamitous consequences for the euro and the world economy. Even if the more likely immediate prospect is sustained stress in the Italian bond market, that will surely prompt investors to flee European assets, making the continent’s recovery ever harder. Meanwhile in the background there is the absurd pantomime of Barack Obama and congressional Republicans feuding over how to raise the federal government’s debt ceiling to stave off an American “default” (see (this language is not supported, see … for more info)). That may have distracted American investors briefly; once they realise how much is at stake in Italy, it will not help.

. September 14, 2011 at 9:09 am

In the end, Europe will remain an enormously prosperous place. The net worth of Europe — its economic base, its intellectual capital, its organizational capabilities — is stunning. Those qualities do not evaporate. But crisis reshapes how they are managed, operated and distributed. This is now in question. Obviously, the future of the euro is now widely discussed. So the future of the free-trade zone will come to the fore. Germany is a massive economy by itself, exporting more per year than the gross domestic products of most of the world’s other nation-states. Does Greece or Portugal really want to give Germany a blank check to export what it wants with it, or would they prefer managed trade under their control? Play this forward past the euro crisis and the foundations of a unified Europe become questionable.

This is the stuff that banks and politicians need to worry about. The deeper worry is nationalism. European nationalism has always had a deeper engine than simply love of one’s own. It is also rooted in resentment of others. Europe is not necessarily unique in this, but it has experienced some of the greatest catastrophes in history because of it. Historically, the Europeans have hated well. We are very early in the process of accumulating grievances and remembering how to hate, but we have entered the process. How this is played out, how the politicians, financiers and media interpret these grievances, will have great implications for Europe. Out of it may come a broader sense of national betrayal, which was just what the European Union was supposed to prevent.

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