What Is the Next Sick Economy of Europe?

Domenico Lombardi
Domenico Lombardi Director, Policy Observatory - Luiss University, Rome, Former Brookings Expert

May 27, 2010

Editor’s Note: Attention has shifted from the financial troubles in Greece to other troubled euro zone countries. In an interivew with PBS NewsHour, Domenico Lombardi discusses which European countries are in the worse shape and what this means for the global economy.

Can you walk us through the situations of those various states in most trouble? Italy, Spain, Portugal, Ireland, even Britain?

Domenico Lombardi: The crisis in Europe is no longer confined to Greece. What was originally a budget crisis in a relatively small economy of the euro area has become a systemic crisis involving the whole euro area. In particular, Portugal, Spain, Italy and Ireland are all affected by potential contagion.

Clearly the issues are a little bit different because in Spain the problem is mainly an unsustainable debt born by the private sector, while in Greece [it] is more an unsustainable debt born by the public sector.

In Italy, it is mainly an issue with the public sector and also the inability of the Italian economy to generate enough growth to serve this increasing pile of debt. However, what is really linking all these countries is that because the Europeans did not act timely in containing the spillovers of the Greece crisis, now essentially this crisis has spread to the other countries of the euro area and assumed really systemic proportions.

Several of these countries have proposed austerity measures. Do they go far enough? Are they realistic or even politically feasible?

Lombardi: Many countries that may be hit by the crisis — like Italy, Portugal, Spain — have adopted or are implementing additional budget measures. This is an important measure, especially in the short-run, because they need to cut down their budget deficits and they need to improve their fiscal position.

However, as important as these measures may be, they are not enough by themselves, because what financial markets are really wondering is to what extent these countries will be able to grow at such a rate that they will be able to serve an increasing pile of debt. This is really the key issue.

Just to make an example, the U.S. and Greece were running the same budget deficit in comparison to their own GDP last year, and yet no one even for one minute would doubt that the U.S. could find itself in the same situation as Greece for many reasons, one being that the U.S. economy is a very vibrant one, has a high potential rate of growth and therefore it is better able to handle an increasing pile of public debt. This is really what European economies lack at the moment — a high potential growth that would help them to stabilize the increasing public debt.

Read the entire interivew »