Growth More Than Debt Key to Euromess

by Ezra Klein

Bloomberg
December 8, 2011

On my blog, I tried for a while to get the term “Euromess” to catch on. Fail. The world seems to have settled on “the European debt crisis” as the accepted term for the run on sovereign bonds that’s bedeviling the euro area. So I gave in and started calling it “the European debt crisis,” too. Now I’m regretting it.

I’ve spent the last week in Germany talking to policy makers, business leaders and bankers. One thing has become clear: This isn’t a debt crisis. This is a crisis first of growth, then of institutions, and only then of debt.

It’s easy enough to prove that this is about more than debt. Let’s start with a puzzle.

Q: What do these six numbers stand for -- 81, 100, 67, 121, 81, 84 -- and what don’t they have in common?

A: According to the International Monetary Fund, those are the respective percentages of gross-debt-to-gross domestic product of the U.K., the U.S., Spain, Italy, France and Canada. But the U.K., the U.S. and Canada can each borrow for 10 years at a rate slightly above 2 percent. Spain, which has the lowest debt-to-GDP ratio of the bunch, is paying more than double that. And note that the U.S. and the U.K., in addition to having larger debt-to-GDP ratios than Spain, also have the largest total debts of any nation on the list.

This is about much more than debt, and the Germans and the European Central Bank know it. They could stop the run on the European periphery. But they don’t want to. They see it as an opportunity. The run is exposing underlying deficiencies in the euro area and putting the periphery economies under enormous pressure, and that’s giving Germany and the European Central Bank the leverage they need to make changes to the currency union itself.

The institutional concerns were put quite starkly in a recent report from UBS: “The euro should not exist,” the report stated. “More specifically, the euro as it is currently constituted -- with its current structure and current membership -- should not exist.”

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