A debt crisis is threatening the already insecure economies of Europe, calling into question the future of the continent. But Europe's woes are largely of its own making—deep-rooted structural imbalances have sent a growth-stifling shock throughout the euro zone. Zhang Monan, a researcher with the State Information Center, discussed this issue in an article recently published in the Securities Times. Edited excerpts follow:
Every financial-related crisis forces corrections to the economic imbalances. The European debt crisis is no exception.
Even with monetary decision-making governance in the hands of a single entity, the European Central Bank (ECB), and the utilization on a single currency, the euro, the fiscal policies of the euro zone remain largely decentralized. The Stability and Growth Pact committed member states to a degree of fiscal discipline. But without heavy sanctions, adequate implementation of the pact has been difficult to enforce. The member governments tend to overspend and accumulate deficits in an effort to stimulate growth and employment. The convenience of blaming the resulting inflation on the ECB has also encouraged this trend.
Since the end of World War II, Europe has woven a secure social safety net for its citizenry. Yet, the generous welfare benefits are weighing down the balance sheets of EU countries. The financial storm only exacerbated government insolvency. Eventually, a debt crisis broke out in Greece, providing a fine example of fiscal extravagance.
Symptoms of the Greek ailment were actually more than just another case of profligate government spending. Agriculture and tourism, which made up a combined 30 percent of Greece's economy, buckled under the heavy weight of the financial crisis. Since global trade lost its fizzle, the shipping sector felt the pinch as well, with revenues diving 31.3 percent in the first eight months of 2009. While recessionary forces took hold, the jobless rate soared to a staggering 9.7 percent in 2009.
In another move, foreign capital inflows to Greece have all but dried up in recent years. The world's big three rating agencies—Standard & Poor's, Moody's and Fitch, jointly downgraded Greek sovereign debt in December 2009, making it harder for the country to raise finances from overseas and sustain the government deficits.
From a broader perspective, the crisis exposed some serious cracks in foundations of euro zone economies. Southern Europe, exemplified by Greece, has reckless consumers and fragile public finances, relying heavily on foreign capital to supplement the low savings. The north, such as Germany, saves big and depends on exports for a source of growth. Also in trouble were central and eastern economies that are reeling from current account deficits and a pile of external debt.
Between east and west European countries, an intractable imbalance is brewing. In past boom times, west European investors flocked to capital-thirsty east European countries, taking advantage of the cheap labor and rich resources. Such economic rapport brought mutual benefits to both regions. But in the wake of the financial meltdown, west European banks have switched off their lending taps, putting a damper on the capital flows.