October 21, 2011
The European debt crisis has put the banking system in peril and is threatening to end the grand European experiment. It is a test of whether European governments can find enough political common ground to find a solution to the problems created by sovereign fiscal policies in the periphery countries. Severe as the fiscal issues are, there are other problems that are likely to divide Europe into prosperous and stagnant zones for a very long time to come. The periphery countries have underinvested in human capital since the Euro was created and this will continue to exacerbate the economic division of Europe. Persistent inequality cannot be good for the stability of the union.
For all of the Eurozone countries faced with unsustainable fiscal policies the solution will involve considerable pain in the form of budget cuts, shrinking public sectors and increases in tax collections. Because draconian fiscal remedies impose a substantial drag on the economies concerned there is now the worry that Europe will become a two-speed continent with the healthier economies like German, France, and the Nordic countries experiencing strong growth and the periphery countries like Portugal, Greece, Italy and Spain growing more slowly.
Read full article as published in Reuters