The bailout package provided for the EU yesterday is not quite a trillion dollars. Lot of money, right? Yes, even in this day and age a trillion is a large number, although our friends in Washington may not appreciate that.
Will the bailout be enough to buy time for the economies of the PIIGS to recover and stop the spread of contagion across the EU and then the world at large? In order to address that question, we need to assess just how big and fat these PIIGS are in terms of their outstanding debt and their fiscal deficits, as well. To this end, I thank a loyal Sense on Cents reader for sharing a chart drawn up by Bank of America which highlights the size of these PIIGS:
Will the PIIGS economies be able to generate sufficient economic growth to finance their debts and deficits at reasonable rates? Great question. We will not learn the answer to it anytime soon, but do not think that the bailout provided to the EU yesterday is an “all clear” signal. The mountain of debt and fiscal deficits within these PIIGS will provide a real drag on these countries and the EU as a whole for the foreseeable future.
The violation of moral hazard involved in this bailout will also serve as an economic drag as well. That concept is quite familiar to those of us in America who appreciate fiscal discipline.