The big danger is Europe

by Robert Samuelson

Washington Post
August 8, 2011

Europe may no longer be able to save itself. Too many countries have too much debt. Its economic growth — which helps countries service their debts — is too feeble. And nervous financial markets seem increasingly prone to dump the bonds of vulnerable countries. This is the real risk to the global and U.S. economic recoveries, far overshadowing Standard & Poor’s downgrade of U.S. Treasury debt and Monday’s sharp stock market decline.

Europe represents about one-fifth of the world economy and buys about a quarter of American exports. While Europe’s debt crisis was confined to a few small countries, they could be rescued; other European countries supplied loans to substitute for the credit denied by private lending markets. In 2010, Greek, Irish and Portuguese government debt totaled about 640 billion euros (about $910 billion), less than 7 percent of the 9.8 trillion euros of debt of all members of the European Union.

With Spain, Italy and possibly France now under financial assault, the situation changes dramatically. There are more debtor nations and more debt at risk. In 2010, Italy’s debt was 1.8 trillion euros; Spain’s 639 billion euros; and France’s 1.6 trillion euros. But there are fewer countries that can support a rescue; and some of them have heavy debts. Even Germany’s ratio of debt to gross domestic product (GDP), a measure of debt in relation to its economy, was a hefty 83 percent last year, similar to France’s. (The big difference between France and Germany is that Germany’s economy is growing faster.)

Until now, Europe’s leaders have tried to muddle through: Rescue Greece, et al.; hope that modest economic recovery and limited austerity by debtor countries cure the crisis. But this formula is reaching its limits.

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