How should Europe deal with finacially troubled countries like Portugal, Greece, Spain?

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Permalink Reply by James Scott on February 7, 2010 at 11:26pm

Seems to be a similar problem in many areas of the world as countries try to respond to the economic recession. First, the recession causes the tax revenue to go down which creates instant deficits - especially in countries that have high levels of spending. Then, countries try to spend more to stimulate the economy - which is supported as a means for getting the economy back on track (and the tax revenues coming in again). Now the economies are slowly coming back, but many countries have a huge debt problem from the trauma and madicine of the recession.

Is there a chance a larger European country will come to the aid of these countries? Germany perhaps?


Here's a conversation about the European debt problem on Bloomberg:




Here's a conversation about the European debt problems on Fox Business News:

(Note: It is primarily from a "what effect on America" point of view while also discussing what will hapen to the value of the U.S. dollar)

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Permalink Reply by paul on February 8, 2010 at 9:58am

I just read an article about the debt problem in Greece:

"Over the past decade, Greece took full advantage of a strong euro and rock-bottom interest rates to fuel a debt binge by the country’s consumers and its government. Now, if Greece can’t persuade investors to buy 53 billion euros of its government debt this year, it may have to seek a bailout from its European Union brethren or the International Monetary Fund — or, worse, to default."

"The stakes are high not just for Greece but for the entire euro zone, where efforts to forge a common economic identity are threatened by the financial crisis. Last week, the panic spread to Portugal and Spain, and the cost of insuring their debt against a default soared to record levels as investors bet that, like Greece, governments in those countries won’t be able to rein in bloated budgets."

"Indeed, as core economies like those of France and Germany show signs of economic recovery, Greece, Portugal, Ireland and Spain are just entering savage recessions. Spain, the largest of the peripheral economies, announced last week that the number of its unemployed had reached four million — the highest in its history — and warned that the country’s deficit might be worse than previously thought."

"As growth slows and debt rises in these countries, government largess for university fees, secure government jobs and lifetime pensions will come under increasing pressure."

"To avoid such a possibility — and to calm the panic in the markets — the European Commission may decide to rescue one or more of the governments. But a bailout of Greece, Spain or Portugal would not be as easy as the United Arab Emirates writing a check to Dubai: The European charter includes a no-bailout clause. Even if such a clause were to be overridden, much of the financial burden — and it would be huge — would fall upon Germany, the richest member of the union, said Daniel Gros, who leads the Center for European Policy Studies in Brussels."

“That is why it would be easier to call in the I.M.F.,” he said."

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Permalink Reply by lea on February 10, 2010 at 6:08am

It looks like Germany is putting together a rescue package for Greece.
This was claimed to be the main reason for the jump in U.S. stocks.

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Permalink Reply by Larry on February 14, 2010 at 10:13am

One of the principle ideas of the EU is to have a currency and market that is large enough to compete in a global economy. The amount of resources each country was utilizing in exchanging their currency, tying laws and regulations with each country, and the "minor" voice they (each indie country) had in global economic decisions resulted in the countries agreeing to the UNION. The EU is just like the union of the states; it would be like Texas saying Michigan should leave the union because they are not pulling their weight or Utah's budget defiect and spending spree legislation is having a detrimental affect on the union's currency value and the citizen's of Utah should be paid less.

The point I'm getting at is that in every free economy there will always be those who can be considered free-loaders. It may be there own fault (Utah in my example) or it may be faults from things unforeseen (Michigan). The PIIGS of the EU (Portugal, Italy, Ireland, Greece, & Spain) are just the same.

Leaving the EU would not be a good choice for the PIIGS; as they are benefiting from the better nations choices and would shatter their economy in leaving. The EU doesn't want them to leave either. The nations will have to respond to their people before they respond to the EU. The EU knows that these nations are hurting the general good and should offer assistance but they can't change the political environment of each sovern nation.

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Permalink Reply by paul on February 14, 2010 at 11:20pm

I agree that the other nations in the EU will have to swallow the pain and help the PIIGS.

However, I don't agree that the EU can't change the political environment of each sovereign country. Part of being in a larger community is living within the rules of the larger community. I'm not exactly sure how the EU works, but if they are a union, there must be a way to set certain limits and expectations for the member states.

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Permalink Reply by paul on February 15, 2010 at 9:51am

Here's Paul Krugman's opinion:

"It’s an ugly picture. But it’s important to understand the nature of Europe’s fatal flaw. Yes, some governments were irresponsible; but the fundamental problem was hubris, the arrogant belief that Europe could make a single currency work despite strong reasons to believe that it wasn’t ready."

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