Is the Sun Setting on the Euro?
Financial tremors are shaking the European Union, and nobody seems to sure about where it all will stop. The European debt crisis seems to be spiraling out of control, and with the lack of cooperation between the member countries of Eurozone (those countries who share the Euro as a common currency) righting the ship is an increasingly dubious task.
Haves and Have Nots
Founded in 1999 Eurozone is a monetary and economic union whose intent was to establish agreeable and standard trade conditions among member nations and promote economic advancement. The easy flow of capital across national borders between the union's “haves” and “have nots” led to unsustainable spending, and an economic crisis at the end of a standard of living boom. The “haves” are the core nations of the union. Countries such as Germany and France, whose net trade deficit is in their favor. These core countries have more developed economies, higher worker productivity, and are primarily production based economies. The periphery nations, mostly Mediterranean states, suffer a negative trade deficit, have less developed manufacturing economies, and rely upon service industries such as tourism, making them vulnerable in a recession.
When Eurozone was founded, the periphery nations took advantage of surpluses from the core to improve their own economies in the form of capital investment. Short term debts were rolled over in favor of investment. Workers' compensation across the union increased, while productivity remained relatively constant. The periphery nations paid a high rate of exchange against the core, and hoped to make up for this with cost of goods produced. The core countries, however, did less to improve workers' conditions to maintain a competitive advantage. The result was an iniquity in trade regardless of the Eurozone's intent. From the founding of Eurozone until about 2006, the global economy was expanding, riding on top of a giant speculative bubble. When that bubble popped, the periphery nations were left with the bill for investments made in an unsustainable future. Now the global economy has stagnated, and the nations of Eurozone don't have the ability to produce either more efficiently, or more cost effectively. The "have nots" of Eurozone's periphery are now on the brink of collapse.
Greece: The First Straw
Greece was hardest hit by the recession. Greece has long had an economy highly dependent on tourism but the inflated property values drove assets to unrealistic levels. The global economic collapse coupled with lack of control over its own monetary policy left Greece without the flexibility to address it's own financial crisis. Bond yields on Greek government bonds rose above 7% triggering investor panic. Greece was left without any measures to pay its debts in the short term. Greece had to accept a bailout of 110 billion Euro's in May of 2010. The floundering Greek economy shows no prospect of being able to produce a surplus at present, and thus any financial relief from other nations is conditionally dependent on Greece enacting harsh austerity measures to reduce their national deficit. Such measures have met with widespread protest with the Greek populace.
The Plot Thickens: Periphery Nations in Trouble
Portugal and Ireland have followed suit, accepting over 150 billion Euros in bailouts contingent on similar austerity measures, met with similar ire from their citizens. Spain has also followed suit, suffering from 21% unemployment, and nearly 40% unemployment among the nation's youth. The unemployment situation in the periphery nations, coupled with the harsh austerity measures needed just to pay public sector bills and long standing obligations have pushed tensions in these countries to a breaking point.
Italy: The Last Straw?
This week, Italian bonds have seen yields exceeding 7% despite the European Central Banks attempt to buy them and decrease this figure. This rise in yields is alarming to investors who recall the Greek collapse at 7%. Italy's debt is so significant that even an initial bailout package of 550 billion Euros exceeds the Central Bank's bailout fund. Unfortunately for the EU, Italy is too big to fail, but too big to save. Fears of Italy's collapse are driving up bond yield rates even in stable European countries, putting every member of Eurozone at risk.
So is the disintegration of Eurozone inevitable? Economist Nouriel Roubini says it's a fifty-fifty chance. The major obstacles to stability in Europe are a weak economy, reluctance of the periphery nations to accept harsher austerity measures to balance budgets, and reluctance of the core nations to accept higher rates of inflation to ease the financial burden on the periphery nations. Even if the core and the periphery can accept these harsh measures, the economic and cultural inequalities of these two entities remain, inviting more issues down the road.
With the Euro's value relative to the dollar on the decline, yet another advantage of the Euro is fading. The periphery nations could see an advantage in breaking the union to re-establish sovereign fiscal policy and enjoy the benefits cheaper exports to boost suffering economies in addition to avoiding further unpopular austerity measures. For the core nations, funding bailouts and the risk of inflation have put even their usually firm footing on a slippery slope. Breaking the union would significantly increase the relative value of currencies like the Franc and the Deutsche Mark.
Collapse may not be a certainty today, but each day brings more speculation, and less certainty. Both are toxic ingredients to a union that desperately needs stability to stay alive.
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