Although Canada has fared relatively well amidst recent financial crises, it has been hard to ignore the current crisis facing much of Europe. The world has been watching this past year as Greece, Ireland, Portugal, Spain, and others among the 17 euro nations struggle with growing national debts. If the Euro falls, then this could have powerful repercussions in the international market.
In a nutshell, the crisis is owed to the mounting national debt of many Euro nations. Particularly in the past five years, nations have spent far more money than they can earn and often surpassed the European Union’s allowable debt limit of 60% of the GDP. Until recently, this didn’t have a severe impact on Europe’s economy, perhaps in the shadow of the US housing market disaster. However, international investors have begun to lose confidence in heavily indebted nations, which is causing interest rates to climb up a slippery slope. Intuitively, higher interest makes it harder for broke nations to borrow money because it puts them further in debt. This is why we’ve seen global credit ratings fall for nations like Greece and Italy.
To put the current situation in perspective, as of September 2011, the International Monetary Fund reported the EU’s total public debt to be 80%. However some nations far surpass this level. At 143%, the Big Fat Greek Debt is causing the most unease, with Italy not far behind at 119%. Meanwhile, many Eastern European and Scandinavian countries remain safely below the 60% limit, although they have much smaller economies.
Many Euro nations are now enforcing austerity measures such as cutting deals with banks to forgive some debt, raising taxes, government job cuts, or downsizing public services. This has led to massive public protests and changes in government; most notably the Greek coalition government as of November 11, 2011. It has also been fuel for many “occupy”-style protests which demand fundamental changes to government to deliver democracy to everyone and which blame many national problems on corruption and inequality. One such series of protests were the 15M Madrid protests which I witnessed outside my window while on co-op, and the banners still hang on various buildings and small camps of protesters still “occupy” occasional street corners.
Whether it is public protests, domination of news stories and conversations, or a general air of frugality, the financial crisis is on the minds of all Europeans. There is no sense of impending doom as some newspapers would have you believe, but the unease is clear as the International Monetary Fund reluctantly doles out multi-billion dollar bailouts and non-euro investors lose confidence in what they see as too risky an economy. Each Euro nation has its own particular reasons for its debt accumulation, but the most infamous has probably been Greece and Italy’s tax evasion problems and embarrassing book-keeping slip-ups. The upper-middle classes tend not to declare much of their income and property, contributing to government debts, and hinting at other forms of corruption. For example in 2010, after Greece’s 3.7% budget deficit for 2009 was revised to a whopping 12.7%, and then a few months later to 13.6%, the world took a more critical look at Europe’s books and the governmental finger-pointing only got worse.
So why the massive bailouts instead of just making countries own up to their debts and lie in ruin? In order to understand why the European Commission is keen to prevent any nations- including Greece- from leaving the Euro, it is necessary to understand why the Euro was created in the first place. The idea behind a single currency in Europe was to enable internal trade and tourism, thus boosting the economies of all member nations. Initially 11 countries adopted the Euro in 1999, and gradually other countries came on board to total 17 members today. If one country exits the euro, i.e. Greece, then other indebted countries may follow suit, which could severely weaken the Euro’s power because it just so happens that Europe’s most indebted nations, such as Italy and Spain, also have some of its biggest economies. Thus, we will continue to see bailout after bailout and austerity measure after austerity measure.
Aside from reading news articles about every single government vote on austerity measures, all we can really do is wait and speculate about how the crises will peak and play out. The current plan, hatched in late October by European leaders in Brussels, is a “three-pronged” attack. The first prong deals with Greece alone by forgiving 50% of its debt to private banks. This is on top of the 110 billion and 109 billion euro bailouts already received by Greece. The second prong is to boost the 500 billion Euro bailout fund to 1 trillion Euros allow contributions by international parties, enticing them with investment insurance. The final prong is to put more money into European banks somehow, either by private means or further budget reforms.
Will this three-pronged attack successfully slash Europe’s debt, or will it fall flat like many a bailout package? The key nation to watch is Greece, which is an indication of how a nation teetering on the edge will fare internally and on the world stage. From a Canadian standpoint, there is not a lot to be worried about unless, of course, you do business with a European company threatened by the crises. My advice is to stay tuned, but don’t buy into the all of sensationalism because we’re not quite living in cardboard boxes over here in Europe. The amount of bureaucracy that contributed to the crisis is also at work to get rid of it, so political involvement mixed with a lot of patience is what a lot of people have been forced to have.
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