Jahangir's World Times First Comprehensive Magazine for students/teachers of competitive exams and general readers as well.
An analysis of measures taken and efforts made to overcome the economic crisis of eurozon and the prospects of their proving to be fruitful.
World leaders spent colossal amount of time in 2011 to resolve the eurozone crisis which spun out of control. Foreign Secretary William Hague called the euro a ‘burning building with no exits’. Tragedy of circumstances is that 2012 looks set to be not much different than 2011. Eurozone governments hammer out new rules to reduce the scale of economic crisis that is spilling over their borders.
To join the currency, member states had to qualify by meeting the requirements of the treaty: budget deficits, inflation, interest rates and other monetary disciplines. Of EU members, the UK, Sweden and Denmark declined to join the currency. Since then, there have been many twists and turns for the countries that use the single currency.
So what really caused the crisis was a big build-up of debts in Greece, Italy, Ireland, Portugal, Spain, France, UK and Germany. Each country promised to keep their total borrowing each year to less than 3% of their GDP’ the total output of their economy. And to join the euro in the first place, they were also supposed to have debts less than 60% of their GDP. The latter requirement was dropped at the outset, because otherwise Germany itself would have failed to qualify. Its debts, when the euro was created in 1999, were 60.9% of its GDP. Then the entire stability pact had to be scrapped, as Germany broke the 3% annual borrowing limit every year from 2002 to 2005.
It is interesting to study the countries caught in debt web. Greece is heavily indebted to eurozone countries (252% foreign debt to GDP) and is one of three eurozone countries to have received a bail-out. Its debts have reached 300bn euros ‘the highest in modern history. Italy has a large amount of debt, but it is a relatively wealthy country compared with Greece and Portugal. France is most exposed to Italian debt. Ireland fell into recession as a result of the global credit squeeze. It shows a very high level of gross foreign debt to GDP (1,093%) because, although it is a small country, it has a large financial sector. The UK is Ireland’s biggest creditor. Portugal, the third eurozone country to need a bail-out, is in deep recession. It is currently implementing a series of austerity measures as well as planning a series of privatisations to fix its shaky finances and reduce its debt burden. The country is highly indebted to Spain, and its banks are owed 7.5bn euros by Greece.
Besides the above-mentioned four countries having high risk status, there are Spain and France in medium risk. Spain owes large amount to Germany and France. However, its number one worry is bailed-out Portugal, which is indebted to it by billions of euros. The bursting of a housing and construction boom in 2008 had plunged Spain’s economy into a recession deeper than in many other European countries. Europe’s second biggest economy (France) owes the UK, the US and Germany the most money. However, like in Germany’s case, these countries also owe France billion in return. France’s problem is that it is greatly exposed to the eurozone’s troubled debtors. Its banks hold large amount of Greek, Italian and Spanish debt.
The UK economy remains in the doldrums and the country is highly exposed to Irish as well as Italian and Portugal debt. The UK in turn owes hundreds of billions to Germany and Spain. Anyhow, it is at low risk status with 436% foreign debt to GDP.
The biggest European economy (Germany) owes France, Italy and the US most money. However, these economies also owe Germany billions in return. Regarding its relationship with the troubled eurozone countries, Germany is exposed to Greek, Irish and Portugese, but mostly Spanish debt. And as Europe’s industrial powerhouse, any problems in Germany mean more problems for the eurozone, and for the wider international system. Germany is inflicted with 176% foreign debt to GDP, being at the lowest risk according to some other calculations as well.
Among mounting debts, Europe is struggling to find a way out of the eurozone crisis. After Greece, Ireland, and Portugal were forced to seek bail-outs, Italy ‘approaching an unaffordable cost of borrowing’ has been the latest focus of concern.
When a country can no longer handle its debts, those overseas banks and financial institutions that lent it money are exposed to losses. This spreads the trouble across the world.
The International Monetary Fund (IMF) has agreed to pay 28bn euros towards Greece second bailout of 130bn euros. The bailout is intended to help keep Greece funded until 2014.
Although the immediate threat of defaulting on its debt looks to have been averted, Greece still faces years of economic struggle.
Spain was staring into the same financial abyss that had already swallowed Greece, Portugal, Irish Republic and Italy. When it joined the euro in 1999, it broke the debt rule, with a ratio of 62.3%. Households are cutting their spending as they struggle to repay their debts. And unemployment ‘always high in Spain’ has shot up to 21.5% of the workforce. Spain’s budget deficit for 2011 was 8.5% of GDP. All of which makes financial markets nervous about lending to Spain.
The Italian government debt, at 118% of GDP is certainly high. Its economy is so weak. Italy is plagued by poor regulation, vested business interests, an ageing population and weak investment, all of which have conspired to limit the country’s ability to increase production. Now the market has lost confidence in Italy. If nobody will lend to Italy, then Italy cannot repay the debts. And if Italy cannot repay its debt, then nobody will lend to it.
France, like most other European countries, faces the twin conflicting imperatives of trying to find growth while lowering debt.
Germany, the great European financial disciplinarian, was struggling because the cost of reunification with the former East Germany had left a big hole in its budget. The economy of Germany grew at nearly 4% and last year at 3% more than decent by European standards. Latest figures show that it slowed at the end of 2011. The indications are that this year it will grow by about 0.5% measly by recent standards, but far from the recession expected elsewhere.
Outsider Switzerland feels Europe’s pain. About half of Switzerland’s exports are going to the eurozone, close to 60% to the EU, so once there is a recession in Europe this is a drawback for the Swiss economy. Everything from cheese, to watches to machine tools had become too expensive for the EU, and orders were cancelled. The strong Swiss franc has caused tremendous problems for the export sector. As a result, many Swiss manufacturers are introducing measures aimed at cutting their costs, from increasing working hours and pegging salaries, to actually laying off workers. If Europe’s economic woes continue, Switzerland too will feel the pain.
In the wake of recent measures taken by EU leaders, eurozone shows tentative signs of recovery though it has to go a long way to recover the effects of ill-managed economies.
