Benn Steil, Senior Fellow and Director of International Economics
The debt crisis that has hammered southern Europe since 2010 will have long-lived economic effects, despite the moderation in Spanish and Italian government borrowing costs since the European Central Bank's "Outright Monetary Transactions" initiative last September.
According to International Monetary Fund projections, the economies of Greece, Italy, Portugal, and Spain will all be smaller in 2017, the last year for which it projects economic figures, than they were in 2009. The Greek economy will take the longest to recover; the IMF projects that Greek gross domestic product will be a full 13 percent lower in 2017 than it was in 2009. Greece is truly in the midst of an economic depression.
Although the European Central Bank is trying to bring down commercial borrowing costs in southern Europe in order to spur economic activity, these remain, on an inflation-adjusted basis, extremely high owing to market fears of heightened credit risk and the possibility of eurozone exit. Divergence in private-sector borrowing costs between north and south actually reached record levels in January.
Economic weakness in southern Europe will undoubtedly slow economic growth in the rest of Europe because of close economic ties within the European Union. Germany, currently the strongest economy in Europe, directs a substantial 40 percent of its exports to other euro-area countries, and many of these will be in recession for some time to come.