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Jun 02

Eurozone Crisis

European Union is an economic and political union or confederation of 27 members which are located in Europe. EU is an also monetary union but as currency based not 27 members are joint the union. A monetary union, the eurozone, using a single currency comprises 17 members. Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Spain are the members of eurozone.

During 2010-2012 period, Eurozone crisis stated in worldwide news and it’s effect on global economies. Global economies effected from Eurozone crisis because eurozone countries export many goods and services around the world and during the recession period, importers face difficulties about those goods and services which are provided from eurozone countries. Eurozone crisis erupt with Greece, which create reactions worldwide. After Greece, Spain, Italy and Ireland faced with crisis but it never effect these two countries’ economy like Greece. This crisis is about sovereign debts and it’s really hurts economies like Greece, Italy, Spain, Iceland which are not powerful as Germany, England and France. But what happended during a globalization period to Greece and other countries, which faced with great recession in their economies’? The European Sovereign debt crisis has resulted because of the many factors and I will state them with my opinions.

The European sovereign debt crisis has resulted from a combination of complex factors like followings:

1) Easy credit conditions during the 2002-2008 period that encouraged high-risk lending.
2) International trade imbalances exist.
3) Real-estate bubbles that have since “burst”!
4) Slow economic growth in 2008 and later
5) Fiscal policy ( G, T ) choices related to government revenues and expenses.
6) Approaches used by nations to bailout trouble banking industries and private sectors

The causes of the crisis begins with the great increase in savings available for investment during 2000-2007 period when the global pool of fixed income securities increased from $36 trillion in 2000 to $70 trillion by 2007. With savings people do not consume and keep economy alive. High interest rates cause saving which hurt eurozone economy. As I stated in 3rd factor of european sovereign debt crisis, real-estate bubbles that have burst, I will give an example about that. For instance, Ireland’s banks lent the money to property developers, generating a massive property bubble.

When the bubble burst, Ireland’s government and taxpayers assumed private debts. In Greece, the government increased it’s commitments to public workers in the form of huge generous pay and pension benefits. Iceland’s banking system grew and creating debts to global investors. In European Union, single country’s manner effect the others like contagion effect. There the contagion is not like the sickness but it’s like “financial contagion”. In my opinion as a union, it’s not have to be political or monetary union, every single manner that members of that union create will effect the others and at the beginning of the making being union decision, members or union makers consider this factor. Yes, in EU there is “financial contagion” exist. For instance, in October 2011 Italian borrowers owed French banks $366 billion. Should Italy be unable to finance itself but the French banking system and economky could make pressure which effect France’s creditors and so on. The “financial contagion” is not remain limited in European Union. As I stated at the beginning of my essay, many European countries export goods & services.

With respect to foreign trade and globalization, this financial contagion effect importers ( from EU ). France export goods and get $578,400 million, Italy earn $522,000 million, Belgium earn $332,000 million and Greece earn $26,640 million. But these “millions” fly away with crisis and importers also effected from EU crisis.

Eurozone leaders have agreed to a strong set of rules that will limit their governments “structural” borrowing to only 0,5% of their economies’ output each year. It will also limit their total borrowing to 3%. In 1997, they agreed the same 3% borrowing limit, when the euro was being set up. But, Italy was the worst offender about limiting it’s borrowing by 3%. It regularly broke the 3% annual borrowing limit. But actually Germany was the first big country to break the 3% rule. It’S really interesting that Germany break the rule as a big country because initially Germany present 3% borrowing limit rule but it break it fastly. About 3% limit, the table below shows us countries contribution of this “crime”.

Europe’S economic geography also effect the Eurozone crisis. Averape GDP per capita is not same even approximately around the European Union. Countries monetary policies and as Eurozone show themselves like “great economies” but the reality is not same as they stated in papers or economic reports. Europe highly centralised in terms of economic activity. For instance Western Germany, Benelux, N.E. France and S.England has high GDP but there is also “peripheries” exist. They have high poverty, high youth unemployment and we cannot expect from them huge developments in term of economic activity. An I firmly believe that Eurozone monetary policies are not fixed for periphery regions and this manner obviously cause crisis. Income distribution even more uneven at regional level. In 2002 GDP per capita in Luxembourg was 207% of EU average and in Bulgaria 29% of EU average. With these variables it’s obvious that economic, specifically GDP balance is not exist between EU countries and strong economies like Germany, France and England are damaged from poor economies like Greece, Slovakia, Ireland etc.

As I stated in complex factors of the European sovereign debt crisis, international tarde balance is the cause of crisis. Financial Times journalist Martin Wolf have stated that the root of the crisis was growing trade balances and I really agree with him. From 1999 to 2007, Germany had a considerably better public debt and fiscal ( Government and tax factor ) deficit relative to GDP than the most affected Eurozone memebers. In some period, these countries ( like Portugal, Ireland, Italy and Spain ) had negative balance of payments positions. Trade imbalance, loss of confidence, monetary policy inflexibility and rising government debt levels are the main causes of Euro-zone crisis but the basic factor is “trade imbalances”. From following table I can determine current account imbalances in EU. As we can see Germany and Netherlands have great current account imbalances in terms of EU countries.

To sum up whole variables that I stated during the paper, the worst effected country from crisis in Eurozone is Greece. It has €0.4 trillion foreign debt ( Italy: €2.8 billion, Portugal: €7.5 billion, France: €41.4 billion, U.S.: €6.2 billion, U.K.: €9.4 billion, Germany: €15.9 billion ). An economist, Zderek Kudina states that “European union only takes action after the facts. They only address a situation when it has already become a problem”. In my opinion Mr. Zderek Kudina absolutely right because a few year ago we even don’t know anything about Greece economy’s weaknesses. Europe’s finance ministers on 9 May 2010 to approve a rescue package which is worth €750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility ( FSF ). European countries nowadays make agreements or create bailouts for rescuing Eurozone but it’s too late for creating packages for weak economies. The most important point for Europe’s recovery package has to focus on “trade imbalances” and balance of payments situation in term of whole European union countries. 17 members of EU using Euro (€) currency but they don’t know anything about eachothers spendings but nowadays EU policy makers states that Greece and other critical economies ,which can collapse, have to report their transactions every three months to other members. It’s obvious that if there is 17 different fiscal policies exist, financial crisis will erupt. In my opinion for saving Eurozone countries from crisis, these 17 countries have to create a fiscal policy which can reflect the whole economic situation to eachother. Germany, England and France can understand the economic situation from those variables which are tated in new fiscal policy of weak economies. And the most interesting point is Germany’s manner. Germany as leading country, they want to limit their governments “structural” borrowing to just 0.5% of their economies’ output a year and they take a limit for 3% total borrowing but they disobey the rule. As storng economy,Germany and France cannot help other EU countries as a leader because they have high level of total debt ( stated in the graph below ).

I have an assumption about recovering Eurozone from crisis. With respect to simple GDP formula,

Y= C + G + I + (X – M) if Greece increase it’s government spending, GDP will also increases. In United States, during 1929 economic crisis for rescuing U.S. from recession govenrment increased it’S spending for instance with building new bridge. In my opinion Greece and other bad economies’ govenrments can make expenditures to make better off their economies.

As concequences fixing trade imbalance problem, creating new fiscal policy which reflect whole situation in eurozone countries and making fiscal policy choices related to government revenues and expenses are important factors for recovering Eurozone from crisis.