The European Debt Crisis Has Not Gone Away

Abstract

Dangerous levels of European sovereign debt surprised the world in 2009 when exposed by a severe economic recession and the discovery that considerable government liabilities had been surreptitiously unreported. Bond valuations plummeted calling into question the stability of the European banking system which held almost half of the sovereign debt. Private debt holdings were also under siege from a collapse of real estate prices exacerbating the economic malaise. The perceived inability of European nations to control the problem, particularly in the eurozone, had grave implications for the world economy. Public unrest in Greece in reaction to budget austerity measures became a metaphor for what the U.S. might become if its debt isn’t reigned in. Yet since 2012 when ECB President Mario Draghi pronounced that he would do “whatever it takes” to preserve the eurozone, concern about the debt has abated as bond yields declined to near normal levels. Aggressive monetary easing, bank purchases of sovereign debt, and bailouts funded by the ECB, EU member states and the IMF have stabilized the financial system. But oppressive debt continues to lurk beneath that band aid. This reality flies in the face of complacent politicians, the public and seemingly even investors, who wait for sufficient economic growth to render the cure while fiat money and subsidization tide them over. In the meantime, very high unemployment, flat growth after two years of contraction, and the specter of deflation currently plague the real economy threatening the standard of living, as well as important U.S. export markets. Europe needs a permanent fiscal solution in the form of spending and tax cuts, as well as regulatory relief, which seriously challenge the entrenched entitlement culture that makes Europe’s sovereign debt problem even more serious than the U.S. public debt which enjoys universal safe haven status. Without economic growth predicated on a free private economy, debt will grow, creditworthiness will wane and prosperity will largely disappear. Since there is no political will to do this, that scenario might be deemed predictive as the world watches Nero fiddle.