The Monitor's View

European debt crisis tests unity -- and global economy

Fears that the debt crisis will spread to a big economy like Spain should compel Europe to come together to meet this challenge.

By

The debt crisis in Europe is severely testing European unity – with harmful repercussions for the global economy if solidarity fails.

Much worry now is that financial-market fears about creditworthiness will swamp big indebted countries such as Spain, and beyond that, Italy.

So far, the European Union, with the help of the International Monetary Fund, has been able to “bail out” the debt-burdened countries of Greece and Ireland, saving them from default. The EU could probably handle unsteady Portugal as well.

Recommended: Europe's debt crisis: 5 ways it's been put to good use

But Spain? That economy is two times the size of the other three put together. Madrid has begun austerity measures to prove its creditworthiness, but so had Ireland – until it became clear that its banks were in bigger trouble than first thought.

Spreading economic turmoil in Europe could severely affect global recovery. The United States, for instance, sells 25 percent of its exports to Europe, whose economy represents about a fifth of the world’s.

Two extremes present themselves as a way out. One goes backward, unraveling the single euro currency adopted in 1999 that is shared by 16 EU members.

Wishful thinking – especially among political parties in the opposition – has it that if weaker economies broke from the euro, stronger ones would no longer have to support them. The weaker economies, meanwhile, would be free to devalue their own currencies to stimulate growth.

Unraveling, though, would spark capital flight from poorer countries, destroying banking systems and increasing the cost of foreign debt, which is in euros.

The other extreme is to take the decades-long process of European unity a giant step forward by creating one federal macrobudget for the eurozone. The US has one federal budget, with strong and weak states contributing. But such integration means ceding more national sovereignty – politically impossible now.

This leaves steps that inch toward more financial solidarity. Ones talked about now include increasing the size of a newly formed European bailout fund or spreading risk through a new single “euro bond.” This on top of needed austerity in countries that went hog-wild with spending.

But the strain of competing national interests between eurozone countries makes timely forward movement difficult. In Europe, it’s always decision-by-committee. Will market pressures force agreement?

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...