Financial crises appear to behave much like earthquakes: some small and often ignored buildup tremors; then ‘the big one’; then a series of aftershocks some big some small to rattle the post-quake recovery and rebuilding. The Eurozone’s debt problem falls into the category of big aftershock with aftershocks of its own.
Investors are well rattled. Greece has needed a 110 billion euros bailout to forestall a debt default. The eurozone nations and the IMF are putting together a 750 billion euros reserve in case any one or more of a number of heavily indebted southern European countries run into trouble rolling over their debt while they get their fiscal houses in order. Whether there is the political will to make the necessary budget cuts, and more importantly, the stomach for them among electorates is a different matter, as we have already seen in Greece.
Deep cuts in pubic spending will be a further brake on Europe’s already laggardly recovery, and, at second remove, on the global economy only now getting back on its feet after the 2007-08 financial crisis. The alternative — European sovereign-debt defaults, collapse of the euro and with it Europe’s banking system — is much worse. This weekend’s meeting of finance ministers and central bankers from the G20 will be staring the fragility of the global recovery squarely in the face, and wondering if they can reconstruct the global financial system robustly enough to sustain another big aftershock should it come.