Is Europe headed toward another debt crisis?

In 2010, the Eurozone experienced a sovereign debt crisis that shook the world economy. Today, in the wake of the COVID-19 pandemic, it appears that the Eurozone could be well on the way to another such debt crisis.

It is not only that the public finances of several key countries in the Eurozone periphery are considerably worse than they were on the eve of the 2010 sovereign debt crisis. It is also that inflation has risen to a level that will make it difficult for the European Central Bank (ECB) to continue to keep the Eurozone periphery governments afloat by a continuation of bond purchases on the massive scale that it has been doing to date.

Italy, the Eurozone’s third-largest economy, provides a troubling illustration of the degree to which the public finances of the Eurozone periphery have deteriorated. Whereas in 2010, Italy’s public debt-to-GDP ratio was 120 percent, today that ratio is 150 percent, or at its highest level in that country’s 150-year history. Similarly, whereas in 2010, Italy was running a budget deficit of some 5 percent of GDP, today it is running one of around 10 percent of GDP.

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