How Did Europe Get Into Such a Mess?

Reuters has a good Q&A on how Europe got into the mess that it’s in. Here’s a sample:

HOW DID EUROPE END UP IN SUCH A MESS?

With the euro’s introduction in 1999, unified interest rates allowed members to borrow heavily. Bonds issued by southern European nations were taken to be as safe as German ones. Money flowed into Greece. Spain and Ireland had real estate booms.

The bursting of the housing bubble in the United States and Europe in late 2007 dealt the first blow to the euro zone’s aura of invincibility. Then in late 2009, when a new Greek government found that its predecessor lied about its borrowings and had run up huge debts, the revelation provoked a drastic loss in investor confidence that spread across the currency bloc.

In a recurring theme of the debt crisis, euro zone politicians were slow to react, calling for an investigation into Greece’s financial dishonesty rather than trying to reassure nervous investors who began pulling their money out of the country and demanding punitive interest rates on its debt.

Larger euro zone economies and the International Monetary Fund extended Athens an emergency credit line in May 2010, but by then Greece’s finances had destroyed the illusion that all euro zone members were equal. Investors quickly turned on the weaker economies of Portugal and Spain, driving up their borrowing costs.

Massive losses at Irish banks stemming from the housing bubble forced Ireland to take a bailout six months after Greece; uncompetitive Portugal then followed in May this year.

Still, euro zone leaders missed another chance to reassure markets. Reluctance in Germany, the region’s biggest economy, to fully commit to helping wayward member states meant the rescues did not constitute an effective firewall — markets continue to be difficult for Spain and Italy, which have a combined debt of about 2.5 trillion euros.

Meanwhile, the strict austerity measures imposed on Greece in return for its financial aid have led to a deep contraction in growth, and debilitating spending cuts and tax increases, further undermining confidence.

Adding to the difficulty, Athens is dragging its feet over privatizations and reforms it promised in return for help, putting its next aid disbursement at risk and possibly leaving the government without money for salaries and pensions next month. The liquidity of the sovereign is now in question.

Posted by on September 20th, 2011 at 12:01 pm


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