Europe’s debt crisis

by Robert J. Samuelson

Washington Post
July 23, 2011

Don’t bet that the latest financial rescue of Greece — with some aid also for Ireland and Portugal — will end Europe’s debt crisis. Almost certainly, it won’t.

The reason: contagion. That’s a fancy word meaning that the European Union’s efforts to contain the crisis may ultimately spread it to other countries. Spain and Italy are likely candidates.

If Greece’s debt problems — and those of Ireland and Portugal — were isolated, the latest rescue might work. Together these small countries represent about 4.5 percent of the economy (gross domestic product) of the 27-nation European Union. All have heavy debt loads. Greece’s government debt is now reckoned at about 166 percent of its gross domestic product. Greece can’t borrow in financial markets to roll over maturing debt and cover its existing budget deficit.

The classic solution to this sort of debt problem is simple, if harsh. Governments embrace austerity, reduce spending and raise taxes to curb budget deficits. Meanwhile, they get new loans from other countries or the International Monetary Fund to prevent an economic collapse. If none of this works, they default on debts or negotiate writedowns.

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