The Congressional Research Service also
“If the European crisis metastasizes,
percent, after increasing more than
attributes this problem to high wages
it could create a new Ànancial crisis
100 basis points in a single week.
and low productivity, pointing to the fact
with implications as grave as the U.S.-
Government bond markets have settled
that wages have increased at a rate of
originated crisis two years ago.” This claim
down somewhat in Italy and Spain,
more than twice the Eurozone average
undoubtedly has a certain degree of merit.
although the latter lost its A A A rating
since 2001. As a result of these combined
The size of the U.S. subprime market
in October. Clearly, problems remain
factors, Greece’s current account deÀcit
peaked at less than $2 trillion, while the
in this mix of highly leveraged and
over the period 2001-08 was nine percent,
combined debt of the so-called PIIGS
structurally unsound countries.
compared to a Eurozone average of only
countries (Portugal, Ireland, Italy, Greece,
one percent. In order to Ànance this deÀcit,
and Spain) was nearly triple this amount.
Journal reports: “OfÀcials in heavily
Greece borrowed from abroad, further
A string of restructurings or defaults could
indebted Greece are talking more openly
increasing the country’s debt burden.
mean signiÀcant losses for creditors and a
about potential debt restructuring.” The
potential double-dip recession.
Financial Times concurs, adding that this
begin to close the current account gap, the
Signs of contagion abounded in the
type of talk could become a self-fulÀ lling
Greek government proposes, among other
weeks before the Greek bailout. Yields
prophecy, as Greece attempts to balance
measures, to curb public-sector wages
on government bonds in PIIGS countries
growth and austerity in the face of higher
and increase investment in competitive
moved upward together, and in some
borrowing costs. Any restructuring would
areas, such as tourism and shipping.
cases yield curves inverted—a clear sign
be a destabilizing event, potentially
These reforms are necessary, as high debt
of a looming crisis. Moreover, European
threatening Europe’s fragile recovery.
levels are likely to persist until exports
banks held an overwhelming majority of
Deeper questions remain about the
come in line with imports; however, they
Greek government bonds (89 percent),
future of the European Union itself.
will undoubtedly take time.
with the holdings in France and Germany
Some are skeptical of the Union, pointing
reaching 32 and 20 percent of GDP,
to the problems inherent to a system
respectively. Moody’s even warned that
of independent national À scal policies
“contagion risk” could spread to the much
and uniÀed monetary policy, as well
larger British banking system. Clearly,
as persistent North-South imbalances.
the crisis was no longer conÀ ned to
Others, however, argue in favor of
Greece—or even the periphery. Instability
increased integration to correct these
could potentially spread throughout the
imbalances. Disagreements came to a
head at recent talks over a permanent
Percent of GDP
14 12 10 8 6 4 1999
How Close We Were In early May, Eurozone Ànance ministers,
which carried below-market rates, required a harsh set of austerity measures, including budget cuts of around 13 percent of GDP. For
if Greece and the other PIIGS countries
are able to avoid costly restructurings,
70 60 Mar-10M Greece
the time being, it appears that these measures
sanctions, and creditor liability. Even
questions of voting rights, automatic
120 Index, Jan = 100
bailout package for Greece. These loans,
Government Bond Prices
along with the IMF, approved a $146 billion
0M ay-10 Italy
the future structure of the E.U. remains very much in Áux.
have at least delayed a destabilizing debt
Verdict Still Out
restructuring or default, thereby averting
Over six months after the Greek bailout
crisis brought us again to the brink of
contagion in the E.U. periphery. One wonders,
package was approved, fears remain
collapse, before gradually abating. We
though, how close the European continent
about the long-term solvency of the
are now back from the brink, yet the long-
came to another full-blown economic crisis.
PIIGS countries. In November, Irish
term consequences are far from clear.
It’s astounding how quickly talk of a
yields hit an all-time high since euro
What is known, however, is that “Europe’s
Greek debt crisis quickly shifted to
adoption, reaching over seven percent.
talk of a European one. For instance,
Portugal similarly saw record highs,
European - and indeed global - economic
Greece’s prime minister argued in March:
and Greek yields stood at close to 11
stability for years to come. iBR
111210 hq.indd 22
I N T E R N AT I O N A L B U S I N E S S R E V I E W
Looking back, the European debt
FA L L 2 0 1 0
11/27/2010 3:13:09 PM
Fall edition of the IBR magazine at the Wharton School.