Matthew Yglesias looks at the implications the Greek debt crisis has for the rest of the European Union:
Europe’s transformation from a war-torn wasteland into a rich, peaceful confederation of nations was one of the great political achievements of the 20th century. The 21st-century effort to broaden and deepen that project, through the expansion of the European Union and the more robust political integration of its members, is one of the most ambitious efforts of our own time. The result is the world’s largest economic area and a continent that features a kinder, gentler social model than the one prevailing on this side of the Atlantic. In a number of ways, this united body has weathered the economic downturn better than the United States. But as the recession drags on, the EU’s underlying approach is showing some serious flaws—experienced most acutely as a crisis over the Greek budget deficit—and threatening both the viability of the EU and the global economy as a whole.
The EU’s problem is currently manifesting itself as a series of looming debt crises in Portugal, Ireland, Greece, and Spain — the so-called PIGS. Virtually all countries have seen budget deficits soar as the recession has reduced tax revenues, increased burdens on social services, and led to fiscal-stimulus programs. In many countries, like the United States, Japan, and Germany, broad investor confidence in the timely repayment of debts has ensured that the cost of financing these deficits is low. The debt of these big countries is regarded by investors as a safe haven. To some extent, a rise in their interest payments would be a symptom of something good — revived investor confidence in the public sector and reduced demand for super-safe investments.
