Monday, 13 February 2012



By Ariel Zirulnick,
Christian Science Monitor.

Governments have collapsed. Bailouts have run into the hundreds of billions of euros. Greece is drowning in debt, Italy ousted long-time leader Silvio Berlusconi in a bid to claw its way out, and Spaniards rejected the ruling Socialists, hoping that political change might spare them the woes of their neighbours. Still, the two-year debt crisis builds. How did the eurozone get here?

The graphics below paint part of the picture: untaxed shadow economies, low productivity, and deficit spending. While deficits have been curtailed significantly since 2009 due to austerity measures, some see deeper systemic problems.

Take Greece. "For 10 years, investors basically believed that Greece was Germany," says Jacob Kirkegaard, of the Peterson Institute for International Economics in Washington. But, he says, Greece is "fundamentally a corrupt, dysfunctional government that is unable to raise enough tax revenue to pay for all of its expenses." Then there's Spain. The size of its debt relative to its economy is a manageable 67 percent, but sluggish growth undermines investors' faith that it can repay loans. Those who lost money in Greece are in no hurry to lose more in Spain.

1. Debt as a percentage of GDP


The maximum debt allowed by the European Union is 60 percent of gross domestic product. None of the countries pictured meet that standard.

2. Deficit spending as a percentage of GDP


Deficit spending occurs when a country spends more than it generates in revenue. The maximum deficit spending allowed by the EU is 3 percent of GDP. As shown here, countries sometimes approached zero, or even spent less than they took in, but none of them are breaking even in 2011. Deficit spending has declined with the implementation of strict austerity programs across the EU.

Interest rates

Interest rates on 10-year government bonds are a stark illustration of the growing chances of default. Governments have teetered, or even collapsed, when their interest rate approached 7 percent, deemed the unofficial cut-off for sustainable borrowing.
  • Before the eurozone was formed in 1999, rates averaged between 4.5 and 5 percent. The exception: Greece, which was paying 8.5 percent to borrow.

  • By 2003, Greece and Italy were borrowing at 4.3 percent. France, Germany, Spain, and Portugal were at 4.1 percent – meaning Greek and Italian bonds were seen as only marginally riskier than French and German bonds. Greece hit a low of 3.6 percent by 2005.

  • Interest rates began rising – and the spread began growing in 2009, with Greece registering a 4.8 percent interest rate and Germany only 4 percent – as Europe neared the beginning of the crisis.

  • In 2010, Greece’s rate jumped to 9 percent. Germany’s was at 2.7 percent, with France’s at 3.1 percent. The rate of troubled Ireland and Portugal neared 7 percent.

  • By 2011, the picture was grim: France was at 3.7 percent and Germany at 3.3. Meanwhile, Greece was borrowing at a debilitating 13.5 percent, Portugal was at 8.7 percent, and Ireland was at 9.6 percent. Three months ago, Germany was at 1.83 percent. At the other extreme, Greece was at 17.78 percent. Italy and Spain hovered near 5.5 percent.

3. The 'shadow economy'


The "shadow economy," also known as the "underground economy," is largely untaxed because transactions occur outside the normal channels, which undermines the government's ability to collect revenue. The shadow economy is not just the black market – it can include things like domestic work that employers pay for in cash.

4. Exports as a percentage of GDP


Part of Europe's problem is that today few of the countries have major export bases. Germany remains an export-based economy, but that is not the case in most of the eurozone. A key question when looking at the eurozone, says Kirkegaard, is “Does this country have anything that the world wants to buy?” In many cases, the answer is, "Not much."

5. Size of the public sector


Europe's public sector workers have historically received generous pensions and health care, among other benefits of the welfare system, which in some cases has exacerbated the countries' debt problems. A key facet of austerity plans has been cutting both the size of the public sector and the generosity of the benefits public sector workers receive.

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