The European crisis in seven steps
As much of a threat China’s high and rising debt burden has become to its continued growth, the biggest risks to the global economy probably lie in Europe, and especially in its banking system.
• Growth rates in peripheral Europe continue to be revised downwards, and deadlines for budget deficits extended, and debt levels continue to rise faster than GDP even after seven years of presumed reforms. Because rising debt burdens put downward pressure on GDP growth and upward pressure on the growth in debt, the longer this goes on, the harder it becomes to reverse, the more fragile national balance sheets become, and so the more vulnerable the financial system becomes to a destabilizing shock.
• The imbalances leading to the euro crisis began when Germany, seeking to improve export competitiveness and lower its unemployment rate effectively by lowering wages, put into place policies that reduced domestic German demand and replaced it by shifting European demand to Germany.
• Rather than being resolved after the 2009 crisis, the demand deficiency in Germany is greater than ever and makes it almost impossible for Europe to regain growth without a resolution of its rising debt burden.
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