The slow motion train wreck that is the Eurozone continues to roil bond markets, banks and governments. The complex issues involved cannot be described, yet alone adequately explained, in this short piece but bear with me.
Economic activity is still contracting in much of Europe including the UK, Spain, Portugal, Greece, Iceland, Ireland and, quite possibly, France. To a greater or lesser degree all of these countries are pursuing policies of reduced spending, especially on health, education, welfare and retirement and government employment. In the UK and France this punishment is self-inflicted and relatively mild.
In the remaining countries the cutbacks have been more severe as a result of various bailout terms imposed by European authorities and the International Monetary Fund, or implicitly dictated by the bond market. Or, as the unflinchingly capitalist Financial Times put it in a recent editorial: “European leaders [do not] grasp that states and economies – not senior bondholders – must be kept safe from teetering banks… Instead they are strong-arming the periphery into bailing out savers in the core and the reckless banks they entrusted their savings to.”
In these peripheral countries unemployment is already around twenty-percent of the labor force. National income is falling rapidly with the inevitable result that the ratio of government debt to total income is increasing. A falling economy means falling tax revenues and some increases in public welfare expenditures no matter how determined these governments may be to limit spending. In addition, interest rates on these countries’ bonds continue to rise as the prospect of an eventual default (or restructuring, which is a polite and civilized default) rise by the day. Those higher interest rates, like every other consequence of the wrong-headed policies of a fractious European leadership, only intensify the problem they purportedly set out to solve.
The unavoidable outcome will be an eventual default or restructuring of these countries’ debts as their commitment to continue cutting or their ability to obtain more outside assistance comes to an end.
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