A New Look at the EU Debt Crisis

The European debt crisis of the past two years has now been relegated off market headlines as a result of policies being implemented by European political and economic leaders. Due to these positive changes, government bond yields of the major EU countries especially those with huge debts have retreated to lows not seen in years. 

Among the most indebted EU economies of Portugal, Ireland, Italy, Greece and Spain (commonly known as PIIGS), Ireland is presently best positioned to sustain its debt.

Italy can also achieve debt sustainability within the next 12 months if its government can maintain the current cost of borrowing. As for Spain, this task seems more difficult due to its stagnant economy compared to its size. To compound the country’s woes is the corruption scandal presently rocking the government, whose far-reaching effects will make improving its debt-to-GDP ratio impossible to achieve in the near term. 

Greece and Portugal will need strong GDP growth along with consistently low bond yields to achieve theirs. Although Greece has impressed more in comparison judging from the extraordinary rise of it’s government bond yields. A good sign of European policy makers’ practical resolve to ensure “whatever it takes to preserve the euro” is the European Stability Mechanism - the emergency fiscal crisis tool. 

The ESM which has a €500 billion financial base has now been made operational for emergency lending by EU countries. The OMT program (Outright Monetary Transactions) is yet another weapon in the arsenal of the European Central Bank (ECB), whose objective is to further drive down the cost of borrowing. However, the various governments will have to enforce these measures through unrelenting political will and very strict fiscal discipline all through. 

This will be enough to smother unforeseen economic shocks that may arise along the way; and to further encourage investors who will help with the reform process.