The term 'Eurozone Crisis' is included in the Banking edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
The Eurozone Crisis proved to be the gravest threat facing the world back in 2011, per a warning issued by the OECD. The situation became even more perilous as it worsened in 2012. The crisis erupted seemingly from nowhere back in 2009. This was the point when the world finally woke up to the headlines that Greece could completely default on its massive debt load.
Over the next tumultuous three years, the crisis grew and magnified to the point that it presented the serious possibilities for national sovereign debt defaults from neighboring European nations Spain, Italy, Ireland, and Portugal. The European Union under the leadership of Germany and France struggled to contain the crisis by supporting the ailing peripheral economies. They did this through bailouts they began issuing from the European Central Bank and the International Monetary Fund. Despite these strenuous efforts to bottle the crisis back up, many critics (even within the EU) began to question the validity of the euro common currency itself.
This tragic Eurozone Crisis arose from a number of complicated causes. It began because the rules set out by the Maastricht Treaty which ultimately governed the percentages of debt to GDP levels in member states were simply ignored. Penalties for violators simply did not exist in any enforceable fashion. Even economic leaders and supposed role models Germany and France overspent their own imposed limits. This stripped them of the ability to criticize the other nations while their own financial houses were in proverbial disarray. The sanctions for breaking the rules lacked teeth, save for the ultimate penalty to expel offenders from the eurozone itself. That would have only weakened the block and the single currency had it been rigorously enforced.
Nations of the Eurozone at first were benefiting from the historically low interest rates which led to higher investment capital all made conceivable thanks to the strength of the euro common currency. The vast majority of these capital flow went from Germany and France down to the southern peripheral nations like Greece, Portugal, and Spain. While this boosted liquidity and increased prices and wages in the receiving countries, it also made southern nations’ exports far less competitive abroad.
Being on the euro currency and under the ECB limitations, these nations had no ability to raise their interest rates or devalue their currencies in order to cool inflation. As public spending rose, tax revenues declined, making it increasingly difficult in the Eurozone Crisis and recession that ensued for the national governments to cover their safety net benefits such as unemployment payments.
A third cause of the Eurozone Crisis came from the austerity Germany mandated to those who received initial bailouts. This caused slower economic growth in the nations like Greece that desperately required higher growth. Austerity did manage to increase the Greek exports, but all this came at the expense of slashed public expenditures, a far weaker economy and lowered output, and massively cut pensions for retirees. As a result of bowing to the requirements of its bailout creditors, Greece received forgiveness for half of its simply unsustainable debt load. The measures also served to raise unemployment, decrease the capital available for lending, and slash consumer spending dramatically.
Ultimately, a six point plan solution was presented by German leader Chancellor Angela Merkel to stem the Eurozone Crisis. It launched rapidly starting programs to foster more business start ups. It lessened protections against employees being wrongfully fired. It created mini jobs through lower taxes. It targeted the stratospheric youth unemployment with vocational education and apprenticeship program combinations. It developed special tax benefits and funds to help privatize the still state owned enterprises as in Greece. It set up special economic zones as China already utilized. Finally it made significant investments in renewable energy.
This plan had worked in the integration of East and West Germany at the conclusion of the Cold War. Merkel believed that a devotion to austerity would increase the whole Eurozone’s competitiveness ultimately. The plan followed along the lines of the approved intergovernmental treaty of December 8th 2011.
This treaty performed three actions. It began to concretely enforce the restrictions on budgets which the Maastricht Treaty had mandated. It also assured the bank lenders of the EU that the EU and ECB would guarantee its members and their sovereign debts. Finally it permitted the EU as a whole to work in a more unified, structured, and cohesive unit.
It followed on the heels of a May 2010 bailout fund which the EU set up with 720 billion Euros ($928 billion US dollars at the time, called the “Big Bazooka”) worth of euro bonds, which was intended to stop any other type of Wall Street styled collapse from occurring. This bailout ultimately rebuilt faith in the shaken euro and created a potentially dangerous new rival for the American Treasury bonds.