Sovereign default: The spectre that’s haunting Europe

Years of fiscal irresponsibility took their toll on Europe after it encountered a serious financial crisis. Is the 'Social Model' unsustainable?

By , Guest blogger

Years of fiscal profligacy and an expensive financial crisis have taken their toll on Europe. The sustainability of the European ‘Social Model’ is becoming increasingly unclear. Greece has received huge bailout funds but may still fail to meet it’s debt obligations, Portugal has been forced to effectively halt party politics in order to work through a solution to it’s budget crisis, Spain is acting to tidy up public finances but still looking shaky, as are Italy and Austria, and Germany is rightly terrified of the potentially dire consequences of the Greek disease spreading further. The nightmare scenario is that one of the weaker countries defaults on it’s debts, or gets close enough to seriously spook the markets, thus setting off a domino effect throughout the region.

Which brings us to the UK. Alistair Darling rightly points out that investors are prepared to buy UK gilts with a comparatively long yield, perhaps indicating relatively high confidence. However, this should not make the next government too complacent. The UK deficit is still more than a hundred billion pounds over the amount required of Euro-zone countries in the ‘convergence criteria’, the rules agreed in Maastricht regarding economic prudence for Europe.

Indeed, investors and analysts in the city are warning that the UK may be downgraded from the current AAA credit rating in a post-election re-evaluation of the country’s public finances. An increase in the cost of borrowing would have disastrous fiscal consequences for the UK, meaning that an even larger proportion of spending would go on debt interest payments. Currently, the treasury forecasts that it will spend more on servicing debt than it will on policing or defence in the coming financial year. Some argue that the only thing separating the UK from the travails of the PIIGS is her comparatively stable economic history and reputation as a financial centre. Whether such a reputation will remain after years of fiscal imbalances remains to be seen.

Recommended: Five ways US debt default would affect you

The UK has a major potential advantage in the city of London. The next UK government will be forced to make extremely difficult decisions about the nature and origins of economic growth: does it risk political humiliation and bow to the City, thus securing a competitive advantage for the nation, or does it ‘rebalance’ the economy, reducing the role of the City, and risk losing what is seen by many as the most dynamic area of the UK economy. The prospect of a hung parliament may complicate things even further.

Either way, it seems clear that times are different now. In the UK and across Europe, governments will not have the kind of money to engage in rounds of public spending of the type seen by Labour in 2001. Will this be a catalyst for reforming public services and welfare states across Europe? The increased pressure on public finances as well as demographic issues, especially in Germany and Italy, would suggest so.

It would be ironic if, as the USA moves towards a more European-style healthcare system, Europe (UK included) starts to realise it can’t afford its own.

Add/view comments on this post.

------------------------------

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...