The Eurozone Crisis

Topics: Monetary policy, Inflation, European Union Pages: 7 (1637 words) Published: June 28, 2014

The Eurozone Crisis

Sagana J
11/18/2013
ECON 3860
Word Count: 1,495

The Eurozone Crisis
The Eurozone is a combined group of countries using the euro as their only currency. It was created in 1999 and currently consists of 17 countries – not all part of the European Union (Investor Words). Within the Eurozone, the countries follow a monetary policy and controlled by the European Central Bank (in other words, the ECB controlled the supply of the euro within the 17 countries). In an attempt to control government debt levels and deficit spending the Maastricht Treaty was created. As years passed, some countries government deficit began to rise and increased debt levels. By 2010, Greece (3% of the Eurozone) had public debt around 100% of their GDP. In order to lower their debt levels, the Greek government had increased their taxes and their borrowing levels. Solutions for fixing this issue consisted of stronger countries paying off the Greek debt – however not everyone agreed to such methods. Eventually, the value of the euro went down in the exchange markets and other Eurozone countries such as: Portugal, Italy, Ireland and Spain faced the same problem as Greece. The International Monetary Fund (IMF) and the European Financial Stability Facility (EFSF) donated money to help reduce the amount of debt – however not enough (Krugman, Obstfeld, Melitz, 2011). Since the Eurozone is controlled by monetary rules and does not consist of fiscal union (government collection of tax’s), it has made it harder for countries to recuperate from the crisis. It has been said that this Eurozone crisis is like a currency crisis as they try to preserve the euro from depreciating and losing value. Although, this is an ongoing crisis, there are certain steps the Eurozone can take in order to release the countries from their ongoing debt levels and hopefully reverse the effects on the euro.

Germany’s idea of fixing the Eurozone crisis is to implement more austerity measure. Austerity is a government method to reduce spending while decreasing government budget deficit. Germany’s idea was to maintain taxes and a low unemployment rate (Westervelt, 2010). Although, this method was successful in Germany, it may not be the smartest route for the rest of the Eurozone since they also face a high private debt it can actually lead Portugal, Italy, Ireland, Greece and Spain (PIIGS) into a recession. It would be wise for them to create a system that will reverse the already designed austerity measures. It is important for them to start focusing more on the economic growth instead of only the budget cuts. Studies have shown that austerity will actually cause Europe to fall into a low-income period with unemployment at a 12.2% high by 2014 (Wishart, 2013). Like mentioned before, there is a high amount of private debt and borrowing from private lenders to repay will not help. The result of such high private debt is more credit on the consumers. As the households borrow more, it trims the consumption part of GDP and firms avoid investing as their bad debt increases the banks are reluctant to lend and eventually the economic growth will go up. One method that may help is to cut back the debt date and by then the interest rates may lower or they can write down the sovereign countries (The Economist, 2013). The austerity measure has failed to bring public finances and debt into control with their increase in taxes that may not work. It is not possible to ship the debt by shrinking the budget deficit. Since the risky Eurozone countries currently have a weak economic activity followed by high unemployment the government cannot go through smoothly with the austerity measures in the first place. It may just result in more debt which the ECB and the IMF will hold (Soros, 2013). The southern part of the Eurozone (PIGS) may not be able to recover from the effects of austerity if placed unlike the northern and much larger countries (Germany)...

References: 1. What is the eurozone?. (n.d.). Retrieved from http://www.investorwords.com/5555/Eurozone.html
2. Krugman, P., Obstfeld, M., & Melitz, M. (2011). International economics: theory and policy. (9 ed., pp. 559-580). Pearson.
3. Westervelt, E. (2010, June 8). Germany introduces austerity measures. National public radio. Retrieved from http://www.npr.org/templates/story/story.php?storyId=127552896
4. Wishart, I. (2013, November 5). Eu lowers euro-area growth outlook as debt crisis lingers. Bloomberg. Retrieved from http://www.bloomberg.com/news/2013-11-05/eu-lowers-euro-area-growth-outlook-as-debt-crisis-lingers.html
5. Debtor 's prison. (2013, October 26). The Economist. Retrieved from http://www.economist.com/news/finance-and-economics/21588382-euro-zone-blighted-private-debt-even-more-government-debt-debtors
6. Soros, G. (2013, April 9). How to save the eu from the euro crisis?. The Guardian. Retrieved from http://www.theguardian.com/business/2013/apr/09/george-soros-save-eu-from-euro-crisis-speech
7. Stetter, E. (n.d.). Austerity is not the solution. Foundation for European Progressive Studies, Retrieved from http://www.feps-europe.eu/assets/9549a450-68b1-479f-9ab9-9bba1bdff0c0/austerity-is-not-the-solution.pdf
8. Grauwe, P. (2013). Design failures in the eurozone: can they be fixed?. London School of Economics, (57), Retrieved from http://www.lse.ac.uk/europeanInstitute/LEQS/LEQSPaper57.pdf
9. The eurozone has a choice: Split up or die read more. (2011, July 18). Daily Mail. Retrieved from http://www.dailymail.co.uk/debate/article-2015428/The-eurozone-choice-Split-die.html
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