What I understand of the eurozone crisis:
Since joining the Euro, countries like Greece & Portugal became accustomed to borrowing and subsequently spending a very large deal of money. People were willing to lend them the money (despite it in heinsight appearing unsustainable) as the view was that countries couldn’t go bust – something which people are only beginning to question now.
The problems with this kind of government spending was bottled up and burst out during the financial crisis, the shattered economy only exacerbated the problem – tax revenue fell. Bailout aid came to Greece, Portugal and Ireland through the ‘troika’ of the IMF, European Central Bank & the European Commission. The bailout aid was needed as the open markets were no longer providing the money they needed.
The bailout helped Greece (as a good example of the eurozone crisis) stay afloat, but more money was lent later on to ensure it stayed solvent. Since then, the economic situation across Europe has arguably worsened – deficit-reduction plans have largely failed, and the eurozone may even be set for recession. The consequences of a disorderly Greek default are almost unimaginably detrimental to the eurozone and as such core countries such as Germany & France are bearing the brunt of the crisis. Whilst printing more money devalues their assets and putting up more cash for bailouts means they have to pay for other government’s mistakes the possibility of a Greek default/banking system collapse is enough for them to carry on.
Why this is still relevant:
With Slovakia no longer holding the eurozone to ransom (having recently approved the bailout expansion), EU leaders are currently in meeting to discuss the debt crisis in Brussels. The head of governments released a statement today, which was deemed vague by the Guardian. Gus Faucher, a director of macroeconomics was quoted today:
“I’m not sure that this is enough. They may be heading in the right direction but not fast enough to head off a crisis. In some ways half steps might be worse than no steps at all. This may cause investors to panic and then there is a real risk of contagion.”
The BBC’s Nigel Cassidy outlined three points that are expected (and are essential) to be addressed:
- A larger rescue fund for Spain & Italy
- A huge debt reduction from Greece
- Protection of vulnerable banks
In a matter of hours we will at last know just how competent & prepared Europe has acted towards the crisis. Markets around the world will open and make a final conclusion.