In a special report, State of the union: Can the
eurozone survive its debt
crisis? the Economist Intelligence Unit (EIU) says the next five years will
be unusually challenging for Europe, even in a best case scenario.
The EIU team with Robin Bew, editorial director
and chief economist, as lead author, says the global financial crisis is having
wide-ranging and long lasting effects. Among the most serious of these is a
threat to the existence of the euro, the most ambitious project in the process
of European integration.
The economists say their baseline assumption is
for agreed reductions in the debt of Greece by 42 percentage points, to 96% of
GDP, and of Ireland by 23 percentage points, to 96% of GDP.
The highlights of the report include:
- Four scenarios outlining how the financial crisis could evolve in the coming
- An extensive analysis of the problems facing individual
- Groundbreaking index to measure each euro nation's vulnerability to contagion
and debt default:
- An overview of the economic and political factors that induced this crisis.
Download report after free registration
The economists say the Eurozone’s current quandary can be summarised as follows.
Much of its geographical periphery is highly indebted and must "deleverage".
Yet, financial markets fear that this may prove extremely difficult within the
straitjacket of the euro. One reason is that all the indebted countries lost
competitiveness during the good times by allowing wages to grow faster than
productivity; none can now restore their external competitiveness by letting
their currencies depreciate against their major trading partners. The crisis,
however, is not confined to the periphery. The authors say the sovereign debt crisis in the
periphery is bound up with a banking crisis across the euro area as a whole.
That connection is overt in the periphery, but suppressed in the core. Some
German banks are currently among the sickliest in the region. As such, they are
poorly placed to withstand any default on peripheral debt (to which they have
The report says: "We expect that both government and current-account deficits in
the periphery will narrow in 2011-13. GDP growth is forecast to turn positive in
Spain from 2011 and to be weakly positive in Greece, Ireland and Portugal by
2013 (although it will be several more years before GDP exceeds pre-crisis
levels). As a result of the stagnation of GDP and falling incomes in the interim
years, debt ratios for households and sovereigns are likely to worsen in all
Despite the peripheral countries’ plight, fear of encouraging
moral hazard will make the creditor countries reluctant to give them any further
respite by easing the terms on which the EFSF lends. As these countries struggle
to service their debts, the official "no debt restructuring" line currently
being peddled by governments in the creditor countries will look increasingly
Indeed, in the cases of Greece and Ireland, the primary surplus
the excess of tax revenue over spending on public welfare and services required
to service their rising debts would be too much to afford. Either these
countries would be economically crippled by excessive taxes, or public welfare
and services would be reduced to levels no longer compatible with maintaining
stable and consensual societies. The issue is likely to come to a head when the
ESM becomes operational in 2013. Given that neither Greece nor Ireland will be
in a position to access financial markets on sustainable terms by then, we
expect them to request a continuation of emergency funding from the ESM
(European Stability Mechanism -- the permanent bailout fund that will be in
operation from mid-2013)."