The Eurozone Crisis
Pigs ruin things. Take, for example, the tenacious refusal of pigs to learn to fly that crushes the dreams of so many. Pigs also have a habit of ignoring building codes that leave people with homes that crumble at the mildest wind. But the worst crime that pigs have committed is the assault of the European economy. Because several countries (seventeen currently) all share the same currency, the Euro, the economic failure of any one of these countries could lead irrevocable damage to the Eurozone as a whole.
Pigs are relevant to this topic because of the acronym given to the countries involved in the possible destruction of the Eurozone: Portugal, (the) Irish Republic, Italy, Greece, and Spain, or P.I.I.G.S. In recent years, the Eurozone has wavered on the brink of collapse, but as of right now it has managed to survive.
After World War II, western European governments gathered together to make treaties that would be more beneficial to international trade. The governments made several treaties to open up trade, but it was eventually decided that the only effective way to open up trade fully was through a common currency. Thus, the Euro was created. In terms of a timeline, the first treaty designed to open up trade was the creation of the European Economic Community (EEC) in 1957. Several decades later, it was decided that the common currency was needed, at which point the Maastricht Treaty of 1992 created the European Union. This treaty created a single market and also allowed for freedom of movement goods, people, money, and services.
Then in 1999, the Treaty of Amsterdam initiated the process to make a common currency for Europe. The Eurozone and the European Union are two different groups of countries. While all of the members of the Eurozone are in the European Union, the reverse is not correct. The Eurozone is made up of the countries actually using the Euro; the EU consists of countries in the Europe that work together to make international trade simpler within the European countries. Still, because the majority of the member states are in both organizations, the two are often confused. The Eurozone has seventeen member states: Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal, Finland, Greece, Slovenia, Cyprus, Malta, Slovakia, and Estonia.
In 2002, European banknotes and coins were introduced into circulation, beginning the use of the Euro. However, from the creation of the Euro, there were flaws. In hindsight, many economists have realized some of these flaws which eventually created the foundation of the Eurozone Crisis. The Eurozone has one central, independent bank, which created a large problem. Because of the independent bank, the currency is not controllable by independent governments.
This could pose a problem should any countries face the risk of default, like several have in recent years. Normally, if a country is at risk for default on their loans, said country can just print off more of their currency, driving inflation obscenely high but nevertheless settling the debt. However, lacking control of the currency causes countries to also lack the ability to print more currency to solve their debt problems. Therefore, the risk of default increases for countries on the Euro. Beyond that problem, there is also the problem of the linked nature of the economies. Because the economies are all linked, if one country defaults on its loans, all countries involved will suffer.
This leads to the problem in the Eurozone right now. For the past several years, many countries have been facing high deficits with little or no chances to balance their budgets. After the Dubai Debt Crisis in 2009, countries have begun to be more conscious of deficits; the Eurozone especially has begun to focus on this issue. What many countries have revealed about their state of finances has culminated into the Eurozone Crisis. Greece especially has been a problem.
In 2009, shortly after the problems in Dubai, Greece revealed that its deficit was 113% of its GDP, meaning that the country owed more to its investors than all of the annual earnings produced in Greece’s economy. The Eurozone deficit limit is and was 60% of the total GDP, meaning that Greece had almost doubled the limit. This discovery lead to rumors that Greece would be forced to leave the Euro. But adding more to the tumultuous situation in Greece was the corruption among the Grecian bureaucrats, which only caused more money to be lost. While initially claiming that Greece did not need a bailout, the government officials instituted austerity measures that lead to people rioting in the streets. Despite emergency recovery loans for Greece increasing from ˆ22 billion to ˆ30 billion, the levels of borrowing in Greece continued to increase.
It was eventually decided that Greece would receive a ˆ110 billion bailout package from the Eurozone members and the International Monetary fund. This was not enough to fix the problem because Greece required another bailout a year later. Several other countries required bailouts as well. Those included were Portugal and the Irish Republic. Other countries required intervention but no bailouts like Spain and Italy which were both helped through the Eurozone member states purchasing government bonds.
Italy also passed austerity measures with more success than Greece. By 2011, the Eurozone had created a ˆ500 billion bailout fund. Still, the country that needed the most intervention was Greece.