Europe's Debt Crisis Five Threats to the Common Currency

First it was Greece. Then came Portugal and Spain, with Ireland and Italy not far behind. The financial crisis has driven up public debt in Europe's common currency zone to such heights that many economists fear the euro could collapse. SPIEGEL ONLINE takes a look at the five greatest risks to the future of the euro zone.

An anti-capitalist piece of graffiti in Athens: Greece's debt crisis is just one of the euro zone's many problems.

An anti-capitalist piece of graffiti in Athens: Greece's debt crisis is just one of the euro zone's many problems.


European Union leaders are gathered in Brussels on Thursday for a summit which will focus primarily on how to address Greece's significant financial difficulties. Already, a number of EU leaders have voiced approval for an aid package for Athens. Financial assistance is on the way, it seems.

"We are talking about lines of credit," said Austrian Chancellor Werner Faymann shortly before Thursday's meeting. He said the money could be made available with the help of the International Monetary Fund. Spanish Prime Minister Jose Luis Rodriguez Zapatero, who currently holds the EU's rotating presidency, also pledged EU solidarity in a meeting with his Greek counterpart. "We need a unified solution," he said. "The EU must prove that it is able to come to grips with the problem."

Graphic: Euro-dollar exchange rate

Graphic: Euro-dollar exchange rate

"If we only look at bilateral solutions, Greece threatens to become the victim or renewed market speculation," said Poul Nyrup Rasmussen, president of the Social Democratic group in the European Parliament. He called for "a unified solution from the countries belonging to the euro zone."

Such demonstrations of solidarity are good news for the euro. On Thursday morning, one euro cost $1.3780, about one cent more than on the previous evening.

The jump is a sign of confidence. For now, most investors seem to no longer believe that the worst-case scenario will come to pass: a Greek bankruptcy which could spread to other EU countries and trigger a market collapse like the one which followed the disintegration of the US investment bank Lehman Brothers in September 2008.

For now, at least.

Greece isn't the only problem facing the euro zone this spring. Public debt has skyrocketed across the Continent as a result of the financial crisis. Plunging tax revenues combined with expensive economic stimulus programs have severely stretched budgets.

In addition to Greece, Portugal is also facing serious difficulties. Spain, too, is under close observation. Of particular concern is the fact that, since the introduction of the euro, both countries have become less and less competitive. Instead of introducing necessary reforms, low euro-zone interest rates in recent years led them to rely heavily on borrowing. The financial crisis and concurrent economic stimulus packages magnified the problem. Greek's budget deficit ballooned last year to 12.7 percent of its gross domestic product. Spain also has a double-digit deficit -- both far away from the 3 percent mandated by the Maastricht criteria of the euro zone stability pact. Strict savings measures and deep cuts in public spending seem the only way out.

Graphic: Budget deficits in the euro zone

Graphic: Budget deficits in the euro zone

The same holds partially true in Ireland. The country likewise faces a large public deficit. The government, though, took drastic action in December, thus easing fears of a national bankruptcy.

Italy, too, has experts worried. The situation is, to be sure, not as bad as in Greece, but state debt has been well over 100 percent of GDP for years -- and the government has shown little interest in dealing with the problem.

That makes five of 16 euro zone states where public finances are in a shambles -- enough to make the entire Continent uneasy. Investors fear that stable countries like Germany, Finland or the Netherlands could ultimately be affected; that they may be forced to pay for the financial errors of Greece and the others; that the euro will continue to drop against the dollar; and that the common currency will become a millstone around Europe's neck.

The threat to the euro is in no way merely a short-term one. Even if Italy and Spain avoid bankruptcy for the time being, what happens if the governments of those countries are too weak to push through the necessary reforms? Both Greece and Portugal have already been hit by serious protests as a result of budget cuts. But without much-needed reform, the gap between the strong and weak members of the euro zone threatens to get ever wider.

Star economist Nouriel Roubini, a professor at the Stern School of Business in New York, voiced fears at the Davos World Economic Forum that the common currency zone could even break apart. Not necessarily this year, or even next. But if the Continent is unable to get its deficits under control, the threat remains.


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