It is a matter of numbers, specifically member state budgets, annual GDP, and financing of debt costs to name a few.
According to the European Commission Spring 2011 'European Economic Forecast', the Euro area's total debt ratio is 87.7 percent of GDP and forecasted regional growth of GDP is 1.8 percent in 2011. On the surface this seems manageable, but the possibility of financial issues spilling over into other Euro States presents a possible economic drag.
The European Commission report also studies the 'contagion affect' of sovereign member states and determines "The spill-over to non-peripheral member states is small and not economically relevant." This is in terms of national insurance cost on debt instruments i.e. credit default swaps which isn't exactly a complete and comprehensive measurement of risk.
So why does economics consider this a potential problem? What happens if Greece, Ireland, Portugal and Spain can't finance their cost of debt? According to the European Commission, it seems to present a manageable scenario. However, with a 1.8 percent GDP for the whole of the Euro zone, there is not that much room to maneuver financially. In other words, should default on debt occur within the Economic Union, what is considered 'not economically relevant' might be a potential economic hazard.
Possible problems that occur with national default or bailouts:
1. Decline in the value of the Euro
2. Increased cost of debt
3. Need for additional bailouts
4. Lower EU GDP
European states that cannot finance their debt are at least a significant factor to an interdependent economic union. Bailing out member states that can't attain deficit reducing fiscal budgets pose an economic drag on those states that are able to manage their debt. The net affect may not be realized or priced into current economic statistics or securities prices. in such case, and if states such as Greece, Spain, Portugal and Ireland can't sustainably maintain debt costs, the potential of economic hazard appears real.
According to the European Commission Spring 2011 'European Economic Forecast', the Euro area's total debt ratio is 87.7 percent of GDP and forecasted regional growth of GDP is 1.8 percent in 2011. On the surface this seems manageable, but the possibility of financial issues spilling over into other Euro States presents a possible economic drag.
The European Commission report also studies the 'contagion affect' of sovereign member states and determines "The spill-over to non-peripheral member states is small and not economically relevant." This is in terms of national insurance cost on debt instruments i.e. credit default swaps which isn't exactly a complete and comprehensive measurement of risk.
So why does economics consider this a potential problem? What happens if Greece, Ireland, Portugal and Spain can't finance their cost of debt? According to the European Commission, it seems to present a manageable scenario. However, with a 1.8 percent GDP for the whole of the Euro zone, there is not that much room to maneuver financially. In other words, should default on debt occur within the Economic Union, what is considered 'not economically relevant' might be a potential economic hazard.
Possible problems that occur with national default or bailouts:
1. Decline in the value of the Euro
2. Increased cost of debt
3. Need for additional bailouts
4. Lower EU GDP
European states that cannot finance their debt are at least a significant factor to an interdependent economic union. Bailing out member states that can't attain deficit reducing fiscal budgets pose an economic drag on those states that are able to manage their debt. The net affect may not be realized or priced into current economic statistics or securities prices. in such case, and if states such as Greece, Spain, Portugal and Ireland can't sustainably maintain debt costs, the potential of economic hazard appears real.
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