The European debt crisis: something will have to give.

Well, we have had the banking crisis and now we are having the resulting sovereign debt crisis.  States have bailed out reckless banks that lent to the sub-prime mortgage market - risky borrowers on low incomes -and now nation states in the 'western world' are in trouble themselves. And recently the issue has come to the fore in the Eurozone: part of the difficulty is that a common monetary policy has prevented weaker economies within the monetary union from 'deleveraging', reducing their debt exposure, themselves by promoting inflation- led growth. The Eurozone has hit the buffers. During the years of growth, countries like Greece, Ireland and Portugal were propelled forwards by the availability of cheap credit and unable to calm down their booming housing markets because they had given away their interest rate independence. On the contrary, export orientated nations, including Germany, were not acquiring large amounts of debt. However, all the economies in Europe were moving in the same direction so the eventual crisis was not foreseen.  

The latest crisis has arisen because countries, primarily in southern Europe have been financially hit by the banking crisis, on top of already large amounts of public debt. The subsequent rate of growth, if it can really be called that, has not been sufficient enough to pay for the interest payments on their debt. The difficulties in Greece, Ireland and Portugal are contrasted with the relatively better situation in Germany and France - where growth recovered quicker, and deficits were not as large. The European Economic zone has fractured: economies mainly in northern Europe now require higher interest rates to combat higher inflation whilst southern Europe requires lower interest rates.  

The worry over the debt credibility of some southern European countries has lead to higher interest rates being demanded by its creditors, putting even more stress on the monetary union. So can the common currency survive this most recent blow to its credibility? Well, the constant bailouts needed from Germany, Finland and France among others are proving politically divisive. They are also only a stopgap which has no democratic consent. They now threaten to hurt economically stable countries, with Berlusconi's Italy and Zapertero's Spain in the firing line: and the simple fact of the matter is that Merkel's Germany and Sarkozy's France cannot even contemplate a bailout of these countries. It seems that British Eurosceptics have been vindicated in pointing out that monetary union without fiscal and debt union is quite simply unfeasible. The founding difficultly is, as Bank of England Governor Mervyn King has eluded, that the imbalance between net-exporting nations, for example China, Germany, Saudi Arabia and Norway, and net-importing nations, like the UK, is a contributing factor to Europe and the world's current woes. It has caused a rather dramatic crack to appear in the global capitalist mechanism which needs to be addressed for any prospect of growth in Europe and the world as a whole. In conclusion, doing nothing is not an option: if radical change and fiscal consolidation does not occur something will have to give.