[Financial Planning for the 100-Year Life] Southern European Debt Crisis More Dangerous Than Asia's

Lee Jong-woo Economic Columnist
"Overseas Analysis Agencies Identify Asia as High-Risk Region for Financial Crisis
But Recently, Southern Europe’s Debt Ratio Has Surpassed Levels Seen During Fiscal Crisis"

[Asia Economy] In 2011, a fiscal crisis occurred in Southern Europe. It began when Greece was found to have concealed its national accounting deficits, and the crisis spread to Italy and Spain. After being managed through cooperation between Germany and European banks, the situation remained stable for over a decade.

Recently, the Southern European crisis has resurfaced. The main reason is that the government debt-to-GDP ratio has risen higher than during the previous fiscal crisis. Greece's ratio, which was 162% in 2012, has recently increased to 196%, and Italy's has risen from 127% to 159%. The increase in fiscal spending following the COVID-19 outbreak caused the higher debt ratios, but while the eurozone's overall ratio rose by 4 percentage points from 91% to 95%, Southern Europe’s ratio surged by 20 percentage points, raising concerns.

On top of this, interest rates have risen. Italy’s 10-year government bond yield once reached 4.9%, whereas it was 1.18% at the beginning of the year. With high national debt ratios and interest rates jumping more than fourfold, most Southern European countries inevitably face pressure to repay interest.

The 19 member countries using the euro can issue government bonds to borrow money but do not have the authority to issue currency. Only the European Central Bank (ECB) holds that right, leaving eurozone countries without one of the policy tools held by other nations. For countries with high debt and weak economies, currency depreciation plays a significant role in improving trade balances, but eurozone countries cannot rely on this. Since the introduction of the euro, countries with strong manufacturing competitiveness like Germany and Sweden have maintained current account surpluses, while Southern European countries have remained in deficit. This is a typical difference between core and peripheral countries, and it is not easy to resolve.

When the EU was established, it signed the Stability and Growth Pact to ensure the soundness of eurozone countries. The pact limits member states’ fiscal deficits to within 3% of GDP and national debt ratios to no more than 60% of GDP. Although the pact was signed, it lacks enforceability, and sanctions against countries violating fiscal rules are unclear, resulting in all Southern European countries recording debt ratios exceeding the pact’s limits.

Because of these vulnerabilities, concerns about the collapse of the euro arise whenever problems occur in Southern Europe. For now, Germany and France, which play key roles in creating and maintaining the euro system, are working together to sustain the EU and the eurozone, so there is no reason to doubt its continuation. However, concerns about the system will persist.

Foreign analysis institutions have identified Asia as the region most likely to experience a crisis. This is because influential regional currencies like the yen and yuan continue to weaken, and many countries have trade deficits. Considering various factors, however, the likelihood of a crisis occurring in Southern Europe is higher than in Asia. Due to the large economic size of the region, any crisis there would inevitably have a significant impact on the global economy. Therefore, efforts will be made to prevent a crisis until the very last moment. If a risk originating in one area spreads to others, the global economy would be unable to cope.

Lee Jong-woo, Economic Columnist

This content was produced with the assistance of AI translation services.