Overview: Debt Crisis in Europe

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Italy currently holds the highest Euro zone debt and the second-highest debt as a percentage of GDP. (Photo: Stock.xchng)
Italy currently holds the highest Euro zone debt and the second-highest debt as a percentage of GDP. (Photo: Stock.xchng)

ECONOMY

  • Greek debt of €340 billion creates uncertainty for Germany
  • Germany's unemployment drops below 2008 levels
  • EESC President supports Eurobonds, further EU integration

Europe's sovereign debt crisis has been spreading throughout Euro zone nations, leading to the bailout of three countries.

Italy has become the latest casualty of the recent European downgrades outbreak, as leaders struggle to swiftly resolve the debt crisis. As Ireland, Greece, Spain, Cyprus, and Italy deal with their ratings cut, the future of the Euro seems more uncertain. The nations that have endured the most these past two years are those who have been downgraded and bailed out.

Downgraded Countries Cut Spending

Financial ratings services firm Standard & Poor's (S&P) recently downgraded Italy (A), Spain (AA), Ireland (BBB+), Portugal (BBB-), and Greece (CC) due to the sovereign debt crisis.

Moody's is also downgrading risky European countries with the following ratings: Italy (Aa2), Spain (Aa2), Ireland (Ba1), Portugal (Ba2), and Greece (Ca).

  • Italy currently holds the highest Euro zone debt and the second-highest debt as a percentage of GDP. The government is targeting its budget with €60 billion ($81 billion) in austerity measures. Although analysts believe the Euro zone can not afford an Italian bailout, the country has the luxury of owing most of its debt to its people rather than foreign investors. Italy has not seen a AAA rating since 1995.
  • Spain has been downgraded twice since 2009 and is considered too expensive to bailout. Spain, with record-high borrowing costs, is adopting austerity measures to better control its finances. The country's housing boom crashed as the economy collapsed, leaving the country with plenty of bad debt and the highest Euro zone unemployment rate.
  • Ireland's banking system has collapsed despite a €85 billion ($115.7 billion) bailout. Ireland spent over €70 billion ($95 billion) to save its largest banks. According to the BBC, the International Monetary Fund believes the island is “showing signs of stabilization.”
  • Portugal has the second-lowest rating in the Euro zone due to its contracting economy. Portugal has received three bailouts totaling €78 billion ($106 billion).
  • Greece is the most troubled eurozone nation, with debt towering €340 billion ($478 billion). The €110 billion ($149 billion) bailout has made French and German banks uneasy.

In early June, market and economic fears lead to public outrage and mass protests, with demonstrations occurring in Britain, Spain and Italy.

Nations Struggle With Debt Exposure

In response to exposure to Greek debt, France plans to reduce spending over the next three years by over €45 billion ($60.9 billion). In September, Societe Generale and Credit Agricole were downgraded by Moody's for excessive exposure to Greek debt.

Since the downgrade, Credit Agricole and Societe Generale have been dealing with a drop in share prices by roughly two-thirds since February. BNP has also plummeted by over half its February share price.

Like France, the UK has heavy exposure to the debt of one of the downgraded nations, Ireland. Although the UK has maintained its AAA rating, S&P lowered the outlook for British debt from stable to negative. Despite the outlook, British gilts are considered one of the safest global investments, with borrowing costs dropping to current lows.

With a deficit last year of 10.3%, the government is attempting the largest UK spending cut since World War II.

Germany experienced GDP growth of 3.6% last year and unemployment lower than in 2008. It plans to reduce deficit by a record €80 billion ($108 billion) before 2014. Germany's main challenge is that most of its neighboring countries are in need of a bailout. Germany has bailed out three nations, with Greece being bailed out twice.

Due to heavy exposure to various debt stricken nations, Germany risks needing to assist its own banks. European Economic and Social Committee President Saffan Nilsson released a statement urging Europe to get “back on track” to finding solutions that will end the debt crisis.

EESC President Responds to the Crisis

In a press release, President Nilsson urged European leaders to quickly announce measures that will improve the union's economic governance by strengthening Euro zone political and economic integration.

The Committee President also called for the protection of “vulnerable social groups” and structural reform in member states; however, he warns that structural reform alone is not a solution and could push Europe back into a recession. Nilsson is confident in the Euro's stability and said he would advocate the launch of a common Eurobond to boost investments and promote solidarity.

He is convinced that members of the EESC should work with social partners to work toward strengthening dialogue.

The EESC President is very concerned about the crisis and is pushing for action by the European Commission's President. He is also calling for the enactment of measures already agreed upon by EU institutions and member states.

The Committee President ended with a declaration of his ambition to work toward securing a “sustainable Europe that is a source of hope for its people.”

Key Statistics – Debt in the EU (source: CIA World Factbook)

  • Greece's public debt is 142.8% of GDP, the fourth-highest debt in the world and the highest in the EU. External debt as of June 2010, exceeded $6 billion.
  • Ireland and Italy each have external debts exceeding $2.2 trillion as of last year. Italy's debt as a percentage is the second highest in the eurozone at nearly 120%, as opposed to Ireland whose debt is only 96% of its GDP.
  • Although Portugal has an external debt nearing $498 billion, its debt consists of 93% of its GDP.
  • Germany and France had over $4.7 trillion in external debt as of June 2010. Having only 1% lower debt per GDP than Germany, France is ranked 17 in the world with 82% debt as a percentage of GDP.
  • Last year, the United Kingdom had nearly $9 trillion in external debt and 76% public debt in comparison with its GDP.
  • Spain, with a 60% debt to GDP ratio, has $2 trillion in external debt.

By Nicole Manuel for
Nicole Manuel is a freelance economics, finance and blog writer with a degree in economics and over two years of experience.

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