Robert Samuelson writes in the Washington Post that “Europe may no longer be able to save itself. Too many countries have too much debt. Its economic growth — which helps countries service their debts — is too feeble. And nervous financial markets seem increasingly prone to dump the bonds of vulnerable countries. This is the real risk to the global and U.S. economic recoveries, far overshadowing Standard & Poor’s downgrade of U.S. Treasury debt and Monday’s sharp stock market decline.”
Europe represents about one-fifth of the world economy and buys about a quarter of American exports. While Europe’s debt crisis was confined to a few small countries, they could be rescued; other European countries supplied loans to substitute for the credit denied by private lending markets. In 2010, Greek, Irish and Portuguese government debt totaled about 640 billion euros (about $910 billion), less than 7 percent of the 9.8 trillion euros of debt of all members of the European Union.
Austerity — spending cuts, tax increases — is standard economic medicine for overborrowed countries. It may work for individual countries or even a few countries at a time. But if most of Europe embraces austerity, the logic backfires. Economic growth slows; recession may reemerge. Lower tax revenue makes it harder for countries to service their debts. As this becomes obvious, the financial crisis feeds on itself. Investors sell the bonds of weak countries, sending up their interest rates and making the debt burden heavier.
“Can Europe save itself?” Samuelson asks. “If not, will anyone? One suggestion is a common bond that would allow weak countries to share Germany’s credit rating; but this would have Germany guarantee other countries’ debts — a role Germans are likely to reject.”
Excerpts from this article are cited here strictly for educational purposes. Students are encouraged to read the full article from the Washington Post online at: http://www.washingtonpost.com/opinions/the-big-danger-is-europe/2011/08/08/gIQABzq02I_story.html