The European Debt crisis

A shared currency
More than half of the member states that make up the European Union use the euro as their single currency. Collectively known as the euro zone, these countries account for 19 percent of the world's gross domestic product and 14 percent of U.S. exports.

A shared crisis
The European crisis began in late 2009 over concerns about Greece's fiscal stability. Fears of instability quickly spread to Ireland, Italy, Portugal and Spain

Structural issues
The euro zone has a central bank and a common currency, but it leaves fiscal policy up to the individual countries. Weak enforcement of fiscal discipline facilitated rising debts. But, locked into the euro, members couldn't make the kinds of changes they would if they had their own monetary policy, like raising inflation or devaluing their currency.

 

A new treaty
The European Union summit in Brussels ended with a pledge among 26 of the E.U.’s 27 nations to work toward a new treaty that would impose tougher controls over government budgets. The treaty is supposed to be drafted by March, but it’s unclear how long it will take to ratify.

What the treaty will include:

• Stronger policy coordination and governance. A procedure will be established to ensure that member states coordinate major economic policy changes.

• Fresh powers to E.U. institutions to slap automatic penalties on governments that recklessly spend or borrow.

• Strict targets on a country’s total debt and annual budget deficits. The treaty will probably give countries several years to reach the limits.

Tough road ahead
Of the 17 countries in the euro zone, all but five are above the proposed cap on total national debt as a percentage of gross domestic product, and all but three are above the proposed cap on deficits.












The state of the euro zone
The debt crisis in the 17-country currency union continues to escalate as financial woes spread from small nations like Greece, Portugal and Ireland to Italy and Spain, the zone's third- and fourth-largest economies.

Size of economy
GDP in U.S. dollars, 2011 forecast



Government debt
Percentage of GDP, as of Q2 2011




Struggling the most

Italy has been deeply indebted for years, and recent fighting over the budget has rapidly increased borrowing costs as investors lose confidence in the country’s financial stability.

Borrowing costs have also surged in Spain,and while the country’s debt burden isn’t as pronounced as Italy’s, Spain runs a higher budget deficit.

Greece, Portugal and Ireland have received bailout funds from the IMF and the EU after agreeing to a series of austerity measures.


The rising cost of borrowing
10-year bond yield spreads over benchmark German bonds*





Source: European Commission. | Graphic: The Washington Post. | *Because Ireland no longer issues 10-year bonds, the chart reflects the difference between Ireland's nine-year bonds and comparable German government securities. | Published July 12, 2011. Updated Jan. 18, 2010.



Missed opportunities in the European economic crisis

The financial crisis among the 17 nations that use the euro has been characterized by a series of missteps and missed opportunities on the part of the region’s political leaders, whose preference for cautious incrementalism has allowed a seemingly limited set of problems in Greece to threaten the entire currency union. They are scheduled to meet later this week for the latest Brussels summit, and they promise that the outcome this time will be different — a convincing set of proposed treaty changes and other measures that will fix the euro’s underlying problems and stabilize financial markets. We’ve been here before . . .







SOURCE: Eurostat; European Commission; Congressional Research Service
GRAPHIC: Laura Stanton and Karen Yourish - The Washington Post. Published Dec. 6, 2011.

http://www.washingtonpost.com/wp-srv/special/world/euro-zone-treaty/