Friday, December 17, 2010

Financial Crisis Heads to Heart of Europe

« Outgoing Belgian Prime Minister Yves Leterme leaves office as his nation faces political and financial collapse.
(Georges Gobet/AFP/Getty Images)
Belgium and Austria could be the next Greece and Ireland.
Belgium’s AA+ credit rating is likely to fall according to ratings agency Standard & Poor’s, signaling that the financial crisis could be beginning to spread to the heart of Europe. The credit rating agency lowered Belgium’s outlook to negative on December 14 saying, “Prolonged political uncertainty could hurt Belgium’s credit standing.”
Belgium has not had a government for six months, and is even at risk of splitting up. New Flemish Alliance leader Bart De Wever, whose party did well in the June elections, called Belgium a failed state, saying in an interview published on Monday, “Ultimately the Belgian state has no future.”
Belgium’s debt stands at 96 percent of its gross domestic product. The country needs to sort out its deficit, yet without a functional government there is no way it can. Investors fear that with such weak leadership, Belgium will not be able to put together austerity measures tough enough to solve its problems.
U.S. think tank Stratfor also highlighted Austria as another potential problem. It doesn’t have the national debt that Belgium has—its is only 68 percent of gdp—but its banks could be in trouble after over-indulging in the central European credit bubble.
Stratfor points out that Belgium and Austria lack the resources that large countries have to tackle their problems. A bigger nation can force its own financial sector to help it out of trouble. Belgium and Austria don’t have that option—they have to go to foreign investors for money. “In good times this is irrelevant,” writes Stratfor, “but when money gets tight and investors get scared, an investor stampede can crush a state’s finances overnight” (December 14).
The eurozone, in its common form, cannot handle economic crises in Ireland, Greece, Portugal, Spain, Italy, Belgium and Austria. It cannot handle crises in just a fraction of these countries. For Europe to avoid a major economic crisis, some major changes will have to be made.