Greece, Ireland, and Spain have been highlighted because of the financial crises they are currently facing. But for any country without its own currency, finding buyers for its maturing and new debt (current government deficit) is critical. Today, these three countries are in trouble. Tomorrow?
As a brief aside, consider what the central banks of the UK and U.S. have done, over the last two years. In 2009, the Fiscal Monitor estimated that Bank of England purchased 86.5% of the government's net new issuance of debt. In the U.S., the Fed purchased 20.9%. Countries using the euro don't have their own central bank to buy up their debt. Unemployment It is interesting to consider the seriousness of the unemployment problems in those countries forced to accept "fiscal discipline." Keynesians would view this as an issue. But even the IMF has some concerns. In another research paper, the IMF found that "a fiscal consolidation equivalent to 1% of GDP leads on average to a 0.5% decline in GDP after two years, and to an increase of 0.3 percentage points in the unemployment rate." [1] IMF unemployment projections are provided in Table 2 below, and they are worrisome. Again, I have highlighted Greece, Ireland, and Spain. They are projected to have higher unemployment rates than any of other countries listed. These will be painful years. In all probability, there will be more "austerity" riots. The Future of the Euro Community The next few years will be tough. On the one hand, the EUR countries forced into austerity programs will really struggle. And German friends tell me they are not at all happy about having to bail out "their weak sisters." However, there is a silver lining for Germany. Many people do not know that Germany competes with China to be the leading world exporter. And German exporters love a weak euro. Add Comment Tweet « First ‹ Previous 1 2 1 "Will It Hurt? Macroeconomic Effects of Fiscal Consolidation", Chapter 3 of the IMF's October 2010 "World Economic Outlook" Elliott Morss is an economic consultant and an individual investor in developing countries. He has taught at the University of Michigan, Harvard University, Boston University, among other schools. Morss worked at the International Monetary Fund and helped establish Development Alternatives Inc. 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