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Is a sovereign debt crisis possible in Europe?

In 2010, two years after the subprime crisis, the euro zone was threatened by the inability of certain States to cope with combined deficits, public deficits and current account deficits. The rescue of the European monetary system has gone through the implementation of solidarity tools (European Financial Stability Fund and European Financial Stability Mechanism) and the application of austerity plans in the countries concerned aimed at reducing domestic demand. and therefore to restore the external balances. Greece was the epicenter of this sovereign debt crisis which also affected the so-called peripheral states: Spain, Portugal and Italy.

As long as a State has an external surplus, which corresponds to a savings surplus, it cannot logically be confronted with a balance of payments crisis or a domestic debt crisis. A crisis can arise with excess savings when savers favor investments abroad. This situation mainly occurs in emerging or developing countries.

Within the euro zone, a debt crisis could manifest itself in a country recording a deficit in the balance of current payments and encountering difficulties in financing it. Are potentially concerned France, Greece, Spain, Italy and Portugal.

In a context of slowing growth, the high level of public debt (100% of GDP on average in the euro zone) and the rise in interest rates, which rose from 0 to nearly 2% for government bonds State at 10 years, increase the risks of crisis.

Current balance of payments crisis

In 2010, the triggering of the crisis in Greece was the rise in the price of a barrel of oil which had increased the deficit of the balance of current payments and weighed on growth. In 2010, the Greek balance of current payments was in deficit by 12% of GDP, the net external debt then exceeded 100% of GDP. Faced with the fear of an inability to repay, investors demanded higher and higher rates. The interest rate differential with Germany reached more than 40 points in 2012, putting the Greek State in a situation of virtual bankruptcy. For Italy and Spain, the gap was 6 points. The rise in rates and the austerity plans caused a fall in domestic demand of 40% in Greece, 10 to 20% in Italy, Spain or Portugal. The 2010/2013 crisis was initially a current balance of payments crisis, accentuated by the imposing public deficits which mobilized a large part of the available savings.

The most fragile countries: Greece and… France

Ten years later, some member states of the euro zone are faced with unprecedented levels of debt in times of peace. The debt ratio was 200% of GDP for Greece, 150% for Italy, 125% for Portugal, 122% for Spain, and 113% for France. Germany’s debt represents 75% of GDP. The financing of the public debt therefore becomes a problem when the States record significant structural external deficits. At the euro zone level, the fragile countries are France, Greece and Portugal to a lesser degree. France’s current account balance shows a deficit of 2% of GDP and the net foreign debt amounts to more than 25% of GDP. Spain’s current account is in deficit by 0.5% of GDP when Italy’s is in surplus. On the other hand, that of Greece remains in deficit by more than 4% of GDP. Spain’s external debt represents 75% of GDP, Portugal’s nearly 100% and Greece’s 175%. Italy, on the other hand, has a positive creditor position of 5% of GDP. The situation of France thus appears more delicate than that of Italy.

Northern European countries are characterized by significant external assets and a positive current balance of payments. If the countries of southern Europe, including France, fail to reduce their external deficit, they could suffer a financing crisis in a context of rising interest rates. The solution to avoid it would be to curb demand by instituting a policy of relative austerity. However, after the health crisis and in times of rising prices, few governments wish to apply such a policy.

The decision of the Brussels Commission to postpone the re-establishment of the budgetary criteria seems to indicate that it is necessary to give time to time before returning to the rules of good management….

  • Philippe Crevel is a specialist in macroeconomic issues. Founder of the company for economic studies and strategies, Lorello Ecodata, he also directs the Cercle de l’Epargne, which is a center for studies and information devoted to savings and retirement in addition to to be our economics specialist.

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