Although you may not hear too much about it, the United States is not the only place in the world burdened by a significantly large amount of debt. The Euro zone, an economic and monetary union comprised of seventeen European Union member states with the Euro as their official currency, faces a similar, if not more dire, situation.
The euro zone’s debt has been growing at a dangerous rate since the end of 2009, especially in the more economically troubled countries, such as Greece and Ireland.
Every government issues bonds in order to finance a country’s daily operations. These can be purchased by a country’s own citizens (domestic debt) or by foreigners (external debt). For example, Greece’s sovereign debt stood at 113% of its GDP in 2009. Of that 113%, 82% was external debt. External debt depresses a country’s economy even more than domestic debt because the interest payments go to another country. In Italy, only 19% of the 115% was external, meaning that most of the interest they are paying in bonds went to Italians.
Both Italy and Greece are part of the PIIGS, a commonly-used acronym used to refer to the five euro zone nations facing economic crisis: Portugal, Italy, Ireland, Greece and Spain. These nations have had a hard time battling their economic troubles because they are unable to employ independent monetary policies.
As of right now, there are three plausible options that can help bring these alarming numbers down. The seemingly easiest option is economic growth; however, for this to happen, the GDP of the country has to increase at a faster rate than the national debt. But unlike countries like the United States, the United Kingdom, and Japan, these countries may not be able to take on debt cheaply. Spain and Italy have 10-year bond rates around 5%, and Greece has a 10-year bond rate of 17%, making this first option simply unrealistic.
Another way of reducing debt is to allow inflation to occur; however, many of the countries who belong to the euro zone are unable to do this because the rate for the euro is set largely by the European Central Bank, whose main goal is to prevent inflation.
The last option is to cut government spending. The UK in particular has taken on this strategy instead of increasing taxes. While this option has the possibility of being the most successful if carried out well, cutting government spending during unstable economic situations is risky. Recent protests in Greece and Britain have turned violent.
These past months have been particularly tense. There have been a lot of emergency midnight and weekend phone calls among politicians trying to sort out their economies. In fact, this week, there was a rumor that the Greek government would have to default on its bonds. But this rumor has not yet been proven true. Hopefully (for nations using the euro), Greece and all of the other countries suffering through this economic downturn will resolve their financial problems expediently.