The National Interest
Nuno Monteiro, Thomas Wright
July 21, 2011
Europe is on the brink of a major financial disaster. Moody’s has downgraded Irish and Portuguese debt to junk, a status until now reserved for Greece. This in turn has led interest rates on Spanish and Italian debt to spike. Contagion of these two major economies is now imminent. If it happens, the global economy will plunge into a crisis that will make the 2008 bankruptcy of Lehman Brothers look like a cakewalk.
For the past two years, the EU has treated the debt crisis in its periphery as a liquidity problem. As Greece, Ireland, and Portugal were forced out of the credit markets by high interest rates, the EU has stepped in, lending them more money. By 2014, Greek, Irish and Portuguese debt is projected to reach, respectively, 180 percent, 145 percent and 135 percent of GDP. At the same time, EU bailout plans have forced troubled countries to implement severe austerity measures that produced recessionary spirals, decreasing the chances that they will be able to meet skyrocketing obligations. Today, Europe's periphery is all but insolvent.
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