The death of the Euro Zone: crisis and conflicts

It was only a few years ago that countries were falling over each other to try and gain entry into the prestigious ‘Euro club’

The Euro is steeply declining in value against other currencies; Photo: Eric Caballero

The Euro is steeply declining in value against other currencies; Photo: Eric Caballero

It was only a few years ago that countries were falling over each other to try and gain entry into the prestigious ‘Euro club’.

Now, the picture is not so golden – we are faced with continuous riots in Athens, discontent from European voters and danger of default risk spreading.

The Greek people are clearly furious at how their national accounts were allowed to deteriorate so dismally. But the protests are too late; fiscal austerity is inevitable. The bailout-package, mainly funded by Germany, comes with strict conditions attached.

The voters of Germany are far from happy either. If the German people weren’t euro-sceptic before, then they may be now. Nationalist mourning for the Deutschmark did not take long to surface following the announcement of the bailout package.

In a recent meeting with Nicolas Sarkozy in Paris, David Cameron predictably distanced himself from the Euro. Who can blame him though? The Government already has one deficit crisis, it certainly doesn’t need to be part of another one.

Greece may just be the beginning though, other economies within the Euro Zone are also at risk of default. Collectively known, rather harshly, as the PIGS, Portugal, Ireland, Greece and Spain are all have deep deficits.

The bailout package offered to Greece may not be sufficient to stop the financial panic spreading towards the West of Europe. When it was announced markets reacted favourably worldwide, however, it seems that this was just a short rest-bite. The Euro members, in collaboration with the International Monetary Fund (IMF), may not have done enough to stem the virulent flow of trepidation.

Could the Euro Zone cope with four bankrupt states on its hands? Also, who would be paying for it all? Both are depressing and terrifyingly real questions.

Bailing out Greece also may have unintentionally increased the risk of default elsewhere. This is due to moral hazard it has created. Portugal and Spain may choose to keep the electorate happy and avoid Grecian-style rioting, rather than make savage cuts, safe in the knowledge a bailout is waiting for them should they crumble.

Despite the pessimism of Angela Merkel, the French seem fairly optimistic about the prospects of the Euro. Optimism seems quite misplaced in the current environment though.

The system of running a single currency through one central bank relies on synchronisation of economic conditions. However, fundamental differences are now bound to arise.

The Euro zone countries who are still a long way from recovery will want consistently low interest rates and the European Central Bank (ECB) may have to print money to cope with chronic leverage levels. This will clash with the other stronger nations who will want to prioritise curbing inflation.

Divergence is going to lead to future conflict within the Euro zone and create challenges that the Euro countries will not have experienced before.

Fun was often poked at the Euro zone for being dull and boring. Now it is definitely exciting, but unfortunately for all the wrong reasons. Whether the Euro can survive its biggest challenge is yet to be seen, but it certainly won’t be easy.  

5 comments

  1. Don’t buy into the media scaremongering; remember that this is what these people do for a living. In 2008, the media were telling us that global capitalism will not survive the credit-crunch. They were clearly wrong. Only a few months ago, they were telling us that Dubai is about to declare bankruptcy. Again they were wrong. Now they are telling us that the EU, the world’s largest economy, is going to be brought to its knees by Greece’s 30bn deficit.

    Realistically, the euro is not going to collapse any time soon. A single currency is necessary for a single market to operate effectively – and doing away with the European single market is in nobody’s interests.

    As for the much-maligned Greece, it has already managed to halve its deficit within the last four months. That’s what the UK (which has a similar level of deficit as percentage of GDP) plans to do in the next four years.

    Yes, there have been many protests, but there has certainly not been ‘constant rioting’. Most protests have been entirely peaceful; all the trouble has been caused by the same sad minority of communist agitators (a remnant of the civil war), whose life purpose has always been to throw molotov cocktails at the police. According to the polls, the majority of the Greek population understands that the fiscal adjustment programme is absolutely necessary.

    “Bailing out Greece also may have unintentionally increased the risk of default elsewhere. This is due to moral hazard it has created. Portugal and Spain may choose to keep the electorate happy and avoid Grecian-style rioting, rather than make savage cuts, safe in the knowledge a bailout is waiting for them should they crumble.”

    There is a huge contradiction in that argument. Greece was forced to implement an extremely savage austerity programme (which includes reducing all state salaries and all pensions by an average of 25%) as an non-negotiable pre-condition for European support. So, the protests were clearly the result of the bailout. I do not believe that any other EU nation (the UK included) will want to reach that point, so the moral hazard argument does not really stand.

    In my opinion, the Euro will not only survive, but it will eventually become the world’s reserve currency. Despite this crisis, the euro continues to be much stronger than what it used to be when it was first introduced.

    The pound, on the other hand, has already lost 30% of its value over the last two years. And considering Britain’s huge deficit (which will be the largest in the EU as of this year) and ballooning debt, the pound’s value will probably not rise any time soon. I think that, sooner or later, Britain will have to join the Eurozone.

    On that point, a politician (who I don’t remember) once said that there are three types of European nations; there are those who use the euro, there are those who don’t use the euro but understand it, and there is Britain. I hope that this strange Eurosceptic attitude changes soon enough.

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  2. Firstly, George, if I remember correctly, I had a debate against you personally hosted by the York Socialists as to whether capitalism is dead… It was not just the media who made this statement, you used to believe it too. Secondly, Dubai did declare bankruptcy, and was bailed out.

    Other than that, I think it is to soon to make any prediction as to what the pound and the Euro will do. Better not to rash and make statements in my opinion. Wait and see what happens.

    A.

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  3. Firstly, Aris, Dubai never declared bankruptcy as it was bailed out in time by Abu Dhabi. Much in the same way that we avoided bankruptcy (for the next 3 years at least) by being bailed out by the rest of the Eurozone.

    Secondly, to say that the economic model of casino-capitalism should die is one thing, to declare it dead is another. If you remember, during that debate I was arguing in favour of extensive intervention in the financial sector, something which I believe is still relevant today.

    Finally, it is true that one can not make predictions about the future, but one can certainly note that economic and political projects of such historic proportions are very unlikely to be abandoned at the first sign of trouble.

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  4. @ George

    “going to be brought to its knees by Greece’s 30bn deficit.” That is a very low estimate of what the deficit is, sources i’ve read are saying nearer to 50bn, also it more the potential combined effect of not just Greece but all of the PIGS, and over many years, not just one.

    “it has already managed to halve its deficit within the last four months.” That may be so, but the economy is shrinking at a rate of 4% per annum, further cuts are going to deepen that recession. So, no capital for fiscal stimulation, and interest rates are already extremely low. Conditions setting Greece up for a long run slump, putting them out of sync with the likes of France and Germany. Also, the UK is cutting, but we are in a much stronger position, with both far higher ratings on bonds and positive growth. The main test/problem is the divergence within the Eurozone, especially when inflation starts picking up, as it has begun to in the UK with the CPI and RPI gathering pace.

    “I do not believe that any other EU nation (the UK included) will want to reach that point”. Of course no one -wants- to reach that point! But sadly, political short-termism can often over-ride prudent economic action.

    It is not a ‘strange’ attitude, when, without a bailout investors stood a high chance of default on Greek government bonds.

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  5. “That is a very low estimate of what the deficit is, sources i’ve read are saying nearer to 50bn”

    50bn is the total amount of money we have to borrow this year. A large part of that, however, is needed to refinance existing debts. Our structural budget deficit (that is to say, how much we collect minus how much we spend) is in the order of 30bn.

    “Also, the UK is cutting, but we are in a much stronger position, with both far higher ratings on bonds and positive growth.”

    Right now, the UK is of course in a much stronger position. But if there is a lesson to learn from the Greek crisis it’s that these things can change rapidly.

    Let’s not forget that the UK has a negligible positive growth which is almost entirely dependent on unsustainable state subsidies, it also runs a 150bn pound deficit (which as I said will be the largest in the EU as of this year both in absolute and relative terms), and finally its credit ratings have a negative outlook and are now pending review. If this crisis continues, the UK may well be in Greece’s position within a year’s time.

    “Conditions setting Greece up for a long run slump, putting them out of sync with the likes of France and Germany.”

    Greece is indeed up against the wall right now, but it does have a hidden ace in the form of a huge shadow economy. Thanks to widespread tax evasion, a very large part of our economy (OECD puts that figure at around 25%-35%) is not reflected in our official GDP[1]. Finally tackling this issue would be enough to solve a very large part of our problems in the long run.

    1: http://tinyurl.com/38fpsur

    (Also, I draw your attention to this sentence: “A revision of this magnitude would reduce deficit and debt ratios substantially. The decision to make this revision, if approved by Eurostat, is due in the second half of 2010.”)

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