Global Biz

Euro debt crisis likely to spill into 2011

(Xinhua)
Updated: 2010-12-30 13:57

COPENHAGEN - The eurozone has been plagued by a sovereign debt crisis throughout 2010, and several financial experts in Denmark warned that the mired situation may extend well into 2011.

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Interviewed by Xinhua on the cause and impacts of the crisis as well as viable solutions, the experts agreed that the eurozone was getting nowhere in ending the crisis.

"The stimulus packages did prevent a complete breakdown, but the eurozone has not yet decided how to handle the government debt crisis in a way that would prevent a repeat of the crisis," said Katarina Juselius, a professor with the economic department of University of Copenhagen.

Jesper Berg, senior vice president from Nykredit, Denmark's largest mortgage lender, said the debt crisis in its nature was the confidence crisis, and it was very difficult to predict whether the market can restore their faith in the bloc's ability to handle the situation.

Asked which country would be the next in need of a bailout, Helge Pedersen, global chief economist from the Nordea Bank, inclined to choose Portugal since it was smaller and therefore more vulnerable to a speculative attack.

Berg, however, voted for Spain. In his opinion, Portugal's problem was still within the control, while Spanish banking sector's trouble was too big to be resolved.

On eurozone's risk for a double-dip recession, Juselius believed it was possible, while Pedersen voiced reservations about such a scenario.

He said economic performances were very different among eurozone members. For example, Germany had so far been running quite well, while for those crisis-hit countries, it would take time to recover.

All of them agreed that there were some similarities between today's crisis and those in history, such as the Latin American debt crisis in the early 1980s, the 1994 Mexican economic crisis, the 1992 European currency crisis, and the East Asian financial crisis in 1997.

Basically, these crises started from the unchecked economic imbalances, which were caused by many factors, such as excessive government expenditure and the real estate bubble.

In Pedersen's opinion, the real estate bubble was the real driver behind all financial crisis.

As to the differences among the crises, Berg said: "European debt crisis started in the financial market that subsequently led to the largest macroeconomic setback since the Great Depression."

"This has exposed underlying weaknesses in some economies, which has rotted public confidence, thus making those with large fiscal deficits become sitting ducks."

When being asked if they agreed that the sovereign debt crisis was partly due to the high-level social welfare spending that has added the government's burden, they all gave negative answers.

"I think this is a complete misunderstanding about the welfare system. Actually, the systems in the Nordic countries are designed to boost businesses," Juselius said, adding that a flexible, competent and non-corrupt government providing a necessary safety net for its citizens is the best guarantee for business to prosper.

Though Nordic countries remained most insulated from the rippling effects of the euro debt woes, Denmark's economy still felt the chill.

According to Petersen, subdued property markets and ever-increasing unemployment rate are two significant negative side effects of the crisis.

Both Pedersen and Juselius suggested that raising retirement age could be one way out to cushion the impacts of the debt crisis on Denmark.

"The Danish government should boost long-term productive investments, such as investment in human capital, in infrastructure, in green technologies....When the wheels of the private sector are running again, it would be time to cut back on government expenditure," Juselius added.

Berg and Juselius also warned that if the debt problem had not been handled properly, the eurozone monetary system would have broken down.

"Since the eurozone is set up, I have such fears that a monetary union with inflexible fiscal rules (the growth and stability pact) would turn out to be too stiff to work out when any of the member states was hit by a large shock," Juselius said.

"What has happened during the recent years has clearly echoed my fears. Therefore, I am convinced that the bloc has to adopt some sort of common financial and budgetary policies."

However, Pedersen believed the eurozone would eventually save itself out of the crisis, and it was unlikely for the whole system to collapse.