Europe: The New Lehman Brothers

What’s the Latest Development?

With the European economy wallowing in the debt of its poorer nations, a former Goldman Sachs employee has been appointed to head the European Central Bank. And while the European economy as a whole may not appear to be drowning, the imbalance between individual economies within the E.U. should not be overlooked, says Irwin Stelzer. Greece has missed its deficit reduction targets; while its economy shrinks by 3.2% annually, its national debt remains 150% of G.D.P. Ireland’s economy is slowing just as it tries to restructure, and Portugal might be the only defense against an Iberian Peninsula collapse; it, too, is restructuring. 

What’s the Big Idea?

Can Europe prevent exposing the global economy to the contagion, i.e. bad assets, of its most indebted nations? If not, what will the consequences be? José Manuel González-Páramo, a member of the executive board of the European Central Bank says that if Greece were to write down 40-70% of its debts, the effects would be worse than the collapse of Lehman Brothers. Perhaps the most dangerous scenarios is a Portuguese default, which would spoil more than $70 billion dollars worth of assets held by Spanish banks. With Spain’s unemployment over 20% and its economy predicted to grow at a rate near zero, a Portuguese default could be disastrous.