As Leo Tolstoy might put it, all of Europe's economies are feeling pretty unhappy right now, but each is unhappy in its own unique way. Nowhere have the effects of the crisis been felt more acutely than in the "peripheral" countries on Europe's southern, northwestern and eastern edges. As the recession worsens, these countries are looking toward Europe's traditional center in hopes of salvation, seemingly unaware that the center itself is struggling to hold, as countries such as Germany and Austria battle with their own version of the meltdown.
As a consequence, the feeling is growing that the Europe's problems are not local or national ones, but that it is the eurozone itself -- in its conception and its architecture -- that is fundamentally flawed, lacking the ability to come to the aid of individual countries in difficulty. Some analysts even worry that we might be witnessing the beginning of the end of the European experiment altogether.
The good news is that Europe can be saved. Rescuing Europe's problem economies will take much more than a simple bailout, though. It is going to require nothing less than a complete recasting of the continent's entire political and financial architecture.
We begin our tour in Spain and Ireland, both until recently considered outstanding pupils by the European Central Bank (ECB) and major economic success stories. The two countries are now in serious trouble as they struggle with the unwinding of a property boom that has its roots in the ECB's ultraexpansive monetary policy. Spain, Europe's fifth-largest economy, entered its first recession in 15 years at the end of last year and is now suffering from 15 percent unemployment, a figure that might rise to 20 percent or more by 2010. Forecasts for Spanish GDP growth in 2009 range from minus 3 percent to minus 5 percent, but the contraction could easily extend into 2010, 2011, and beyond. The Spanish government is still essentially in denial about the scale of the correction needed and has been busy trying to spend its way out of trouble, with the predictable negative consequence that the country's once solid fiscal surplus is now spiraling downward into deficit at breathtaking speed. Indeed, the European Commission (EC) has already initiated an excess deficit procedure against Spain.
As for Ireland, it was not so long ago that the country's economy was experiencing a boom of such proportions that it came to be known as the "Celtic Tiger." Now, the tiger is tanking. The EC forecasts a 5 percent contraction in GDP this year; unemployment is widely expected to hit 11 percent; and house prices have plummeted. As a result, the Irish fiscal deficit is expected to rise to 9.4 percent in 2009. Again, the EC has opened an excess deficit procedure, and the country is being threatened with losing its AAA debt rating.
The EU's most recent members are also feeling the chilly winds of recession. If anything, Eastern European economies and credit ratings are even less capable than their Western counterparts of weathering dramatic increases in debt levels. Thus, in the case of those countries having a significant home-banking presence, such as Latvia and Hungary, the support of external organizations -- the EU, the World Bank, the International Monetary Fund (IMF) -- becomes rapidly necessary when their banks start having liquidity problems. Then, as a direct result of the consequent bailouts, the countries' debt-to-GDP ratios start to rise, putting their eurozone membership in jeopardy. If something isn't done soon, these two countries, and possibly others, are headed for a self-perpetuating process of indebtedness with only one end point: sovereign default.
Latvia and Hungary may be the current worst-case scenarios, but the list of walking wounded is growing by the day. Romania and Bulgaria are now in "informal consultations" with the IMF, while Slovakia and Slovenia (the two Eastern European countries that actually made it into the Eurozone) hurtle off into deep recessions. What's more, the chilly wind has now spread even further north, beyond the Baltics and into Scandinavia. Sweden is in the middle of a much more serious recession than previously thought. Official figures for the fourth quarter of last year reveal that GDP contracted 2.4 percent quarter-on-quarter in the final three months of last year, equivalent to an annualized decline of 9.3 percent. Denmark is in the middle of a housing bust, and its economy has contracted as households spend less and the global financial crisis saps demand for the country's exports. Finnish output also slumped, by 1.3 percent, the most in 17 years, in the fourth quarter of 2008. Certainly the situation is less severe in the north, but in addition to the homegrown recession, Sweden's troubled banking sector now labors under the growing weight of debt defaults in the Baltics and other parts of Europe.
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