News / Europe

Europe’s Economic Struggles Continue Despite Greek Deal

A woman walks past the window of a clothes store announcing 50 percent discounts in downtown Milan, Italy, November 7, 2011.
A woman walks past the window of a clothes store announcing 50 percent discounts in downtown Milan, Italy, November 7, 2011.
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Europe is continuing to struggle with its financial crisis, which is threatening to result in a prolonged period of slow or negative growth and more economic fallout for the rest of the world. 

Just as Greece appears close to resolving its domestic political dispute and accepting a financial rescue package from the European Union, Italy is edging closer to an economic crisis of its own.

Italy’s large debt and concerns about the stability of its government drove up the interest rate on its bonds to more than 6.5 pecent.  That makes it more difficult for the Italian government to borrow money to finance its operations and make payments on its debt.  Experts say a rate of 7 percent would be more than the country could afford and could trigger the need for a bailout by its European Union partners.  

The problem is, experts say Italy is too big to bail out.

The chief economist at London’s Centre for European Reform, Simon Tilford, says the European Central Bank must step in - something its top officials are reluctant to do.

“The problem at the moment is that we’re in a period of exceptionally weak economic growth.  We’re going through unprecedented economic weakness.  And that, I think, requires unorthodox action on the part of central banks,” said Tilford.

Tilford says if the central bank buys some Italian bonds, it will give other investors the confidence to do the same, and at affordable interest rates.  He believes that is a more practical and effective approach to the troubled European economies, arguing that austerity packages like the one being forced on Greece will not actually solve the problem.

“The budget cuts they’ve been asked to make are unfeasible," said Tilford. "If they do attempt to push them through, all they’re going to do is compound the weaknesses.  The current policy response guarantees just almost indefinite stagnation, recession in the Greek economy and ongoing debt servicing problems.”

Research fellow Benedicta Marzinotto at the Bruegel Institute in Brussels agrees that a bailout based on austerity alone may not be the way to solve Greece’s problems, or Europe’s.

“I’m not sure if they are the right way to go.  Some austerity is needed.  I believe it should be complemented with other measure, such as growth-enhancing measures,” said Marzinotto.

Meanwhile, other European countries, notably Portugal and Ireland, are also implementing restructuring plans, and Spain is working to reassure investors that it is a reliable place to put their money.

Marzinotto says Spanish leaders are doing a better job of that than their Italian counterparts, and the coming days will determine whether Italy’s current government or a new one can succeed in calming the bond markets.  That is important because Italy’s economy is nearly three times the size of the economies of Greece, Ireland and Portugal combined.  

“Greece is a serious case but is one that but it is one that can be solved easily because it is a small country," said Marzinotto. "If you have financial markets betting against Italy, that it is as if the financial markets were betting against the euro zone as a whole.”

The European countries depend on each other to be strong export markets, as do many of the world’s developing countries.  That means long term economic problems in some European countries will drag down the growth prospects for the rest of the continent, and for much of the world as well.

The evolving uncertainty about the strength of key European economies made for a volatile and ultimately down day on most world financial markets Monday.  And experts say that is likely to continue unless European leaders agree soon on new, perhaps unprecedented, steps to prevent the fragile financial state of some eurozone countries from spiraling out of control.

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