Europe: Also Doomed

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"Europe: Also Doomed"

With the United States going to hell in a handbasket, I think it’s worth observing that, as best anyone can tell, Europe is also going to hell in a handbasket. To review, Italy has a huge quantity of debt outstanding but it runs a primary budget surplus. Under the circumstances, Italy is solvent if the European Central Bank delivers sufficiently loose monetary policy, but its debt:GDP ratio will steadily grow under the ECB’s actual policy. Nothing in the Greece bailout plan addressed this fact so the crisis was bound to recur.

As it happens, it turns out I don’t have any unique powers of analytic genius and investors figured this out really fast. Consequently, Italian bond yields are now up to an 11-year high and the spread on the interest being charged to Italy over what’s charged to Germany is growing. Needless to say, if Italy goes down then Spain, Portugal, and Ireland are also going down as well. What’s more, Italy-related panic could easily spread to Belgium, which combines Italian levels of outstanding debt with American levels of political paralysis. Belgium’s not a very important country in the scheme of things, but it’s geographically located in the “core” of Europe so this would be the sign that contagion has completely run amok.

The U.S. and the Eurozone combine for over 40 percent of global GDP, so the tendency of the two largest boats sinking is going to be to risk dragging everyone else down with them.

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