Thursday, April 29, 2010

Europe in Crisis?

Walter Russell Mead on the financial crisis creeping up on Europe.
Central banks exist precisely to puncture this sort of bubble, but the European Central Bank wasn’t focused on the peripheral European economies.  The ECB was looking at the big eurozone economies, especially Germany, which was still struggling with the consequences of unification and where austerity programs and labor market reform programs were aimed at putting the economy on a sounder footing long term.  The big economies needed low interest rates and the ECB did its best to provide them.

The result was like pouring gasoline onto a fire in the Mediterranean countries (and in some northern economies like Ireland and euro-linked Latvia).

Now the inevitable bust has come.  More and more investors understand that at least some of the ‘PIGS’ (Portugal, Italy, Greece, Spain) may not be willing or able to service or pay off their existing debt.  They understand that spreads, the difference between what credit worthy countries like Germany pay to borrow money and what countries with bad credit need to pay, need to widen considerably within the eurozone.  Interest rates for the ‘bad’ countries are going up at the same time that their governments are having to slash public spending.  These countries may well go into recession once more, and bad economic times will reduce their governments’ tax receipts, making debt payment harder than ever.

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