The European Sovereign Debt Crisis in Review and Happy Holidays to You!
December 21, 2011
We thought it would be appropriate to celebrate this festive holiday season with a review of the past 12 months of the European debt crisis. Europe has been constantly in the headlines this year, but very little of it has been good news. As the year draws to a close, we have written the following analysis in the spirit of a favorite holiday song, “The 12 Days of Christmas.”
During the 12 months of 2011, the European sovereign debt crisis gave to the world:
- 12 high-stake summits;
- 11 euro-zone countries with public debt over 60 percent;
- 10 Greek sovereign credit downgrades;
- 9 EU member states with unemployment rates above 12 percent;
- 8 “Merkozy” press conferences (German chancellor Merkel + French president Sarkozy = Merkozy);
- 7 euro-area nations with debt yields surpassing 6 percent;
- 6 major austerity packages;
- 5 contracting economies, teetering on recession;
- 4 fallen governments;
- 3 bailout packages;
- 2 emergency visits from U.S. treasury secretary Geithner; and,
- 1 very shaky common currency.
12 European Summits Not-a-Helping
In 2011, European leaders also gave the world 12 months of political and economic “muddling through,” narrowly averting financial disaster without making any real progress. In 2010, only 5 high-level summits took place; this year, there were 12 summits, each doing little to assuage public fears or calm volatile markets. Typically, a solution was eked out at the final moment, but after only a few days, the “comprehensive” solution rapidly disintegrated. In fact, the more summits that were held and the more statements that were released calling for “more Europe” as a solution, the deeper the crisis became.
When the year began, Greece was seven months into its first bailout package; Ireland had just accepted a bailout package after initial resistance; and Portugal was still insisting it could survive on its own. Now, Greece is negotiating its second bailout package and has failed to meet most of its promised targets; Ireland admits its original package is nowhere near sufficient; and Portugal is a core member of the IMF-EU-ECB bailout club. But most importantly, Italy (Europe’s third-largest economy), Spain, Belgium, and France have succumbed to the contagion and could need assistance as well, which causes the overall debt load to jump to 3.7 trillion euros (roughly equivalent to five years of EU GDP). Not even Germany, Europe’s economic powerhouse, can match that sum.
European Leaders a-Leaping (Overboard)
This was not a good year to be a European leader. Four governments fell, and two democratically elected leaders were replaced with technocrats, because of unrelenting markets, demanding politicians, and an angry electorate. If a government was able to hang on until formal elections, it was quickly tossed out of office. Despite significant social unrest, Europeans largely supported leaders who are committed to the euro and the monetary union. But as citizens grow increasingly weary of higher taxes and reduced social benefits without economic growth, for the sake of a distant, elite-led project, the popularity of euro-skeptics and nationalists will rise, with important implications for the 2012 French presidential elections.
Black Swan a-Swimming?
Britain’s decision to remain outside of the new European fiscal compact has created the real possibility of a two-speed Europe, politically and economically. The sovereign debt crisis has created the greatest political rift in the European Community since its inception. Germany and France broke an unspoken rule in October by suggesting that Greece’s exit from the euro was possible. And newly appointed ECB president Mario Draghi publicly spoke about the possibility of a euro-zone breakup. The push and pull between integration and breakup will only intensify in 2012.
If Europe does begin to fragment along economic lines, it will not simply be between the 17 euro-zone countries and the 10 non-euro-zone countries. It is more likely that we will see a much smaller, German-led euro-zone group, consisting of the remaining AAA-credit-rated countries who agree to abide by German fiscal policy with the other euro-zone members being left behind. Clearly, 2012 will be a decisive year for the European family.
One German Lady Dancing?
The euro was a political project to accommodate German reunification in the early 1990s. Germany could reunify if it surrendered its deutsche mark, thereby ensuring that future German economic strength would not dictate European economic policy. Twenty years later, Germany is deciding the fate and future of the European economy with all eyes on the German chancellor, Angela Merkel. Merkel’s slow decisionmaking and inflexible commitment to incremental policy have been widely criticized.
Mrs. Merkel believes she is saving the euro by forcing errant European countries to change their fiscal ways. Necessary change appears only to be possible with recalcitrant politicians when sovereign borrowing costs hit 7 percent. Only time and history will tell if Merkel is implementing the right policies at the right time. The chancellor will find it increasingly difficult to stay on her “step-by-step” course of action while keeping the euro and European politics intact.
2012: No Golden Geese a-Laying?
Most economists believe that Europe has already entered a recessionary period, and for 2012, the OECD has predicted that the euro-zone area will only grow at 0.5 percent. Also occurring in 2012 will be a review of the credit rating of all 27 EU members by the three major rating agencies. Unemployment has risen in a majority of European nations and continues to rise in Greece. European banks are struggling to meet core capital requirements as U.S. money markets flee Europe. European banks have just borrowed a massive half a trillion euros from the ECB, signaling that the private lending market will not be available to it for 2012, a very disturbing sign that the crisis is far from over. And last but not least, the full impact of governmental austerity has yet to be felt in Europe, economically, politically, or socially. More trouble is on the European horizon.
2011 was the year for summitry, but not for problem solving. One hopes that 2012 will be a positive turning point for the European crisis.
From the CSIS Europe Program, we wish you happy holidays!
Heather A. Conley is senior fellow and director of the Europe Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Uttara Dukkipati is a research assistant with the CSIS Europe Program.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2011 by the Center for Strategic and International Studies. All rights reserved.