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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,

More

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

To

promote

competitiveness

and

alarmingly,

The

Wall

Street

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

entire continent.

head at recent talks over a permanent

16

Percent of GDP

14 12 10 8 6 4 1999

2001

20032

005

2007

2009

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

110

90

raising

if Greece and the other PIIGS countries

80

are able to avoid costly restructurings,

70 60 Mar-10M Greece

the time being, it appears that these measures

mechanism,

sanctions, and creditor liability. Even

100

Jan-10

resolution

questions of voting rights, automatic

120 Index, Jan = 100

bailout package for Greece. These loans,

crisis

Government Bond Prices

along with the IMF, approved a $146 billion

0M ay-10 Italy

Spain

Jul-10 Ireland

Sep-10

Nov-10

Portugal

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.

subprime”

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

22

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

will

continue

to

threaten

FA L L 2 0 1 0

11/27/2010 3:13:09 PM

Profile for Daniel Hellwig

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

International Business Review - Fall 2015  

Fall edition of the IBR magazine at the Wharton School.

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