Balancing The Scales in the European Financial Crisis

The European economic crisis is a grave issue that affects many key European powers.  The onset of the harsh economic climate has been devastating to some countries in particular.  The nations of Greece, Spain, Italy, and Ireland are all facing very crucial and serious financial decisions that could either make or break their struggling economies.  While these nations struggle to keep their heads above water economically, other nations are forced to make tough decisions on how to provide aid and stabilize the greater part of the European economy.  Nations such as Germany and Britain are not as negatively affected by the recent economic downturn and are key players in providing relief to the nations that are struggling the most.  However, these nations need to mind their own economic policies and plan accordingly.  The group of countries that are all dealing with these economic problems is grouped together in the Eurozone, or countries that use the Euro as currency.

Some important questions to first ask are the simplest ones.  What is the European debt crisis, and where did it come from?  In the most basic of definitions, the debt crisis is not unlike any other debt crisis; it is simply on a larger scale.  Many nations within Europe have borrowed excessive amounts of money because interest rates were very low.  However, as the interest rates began to rise, some nations found that they may not be able to pay back their debts.  Unlike when a single person defaults on a load, an entire country being unable to pay off its debt has severe consequences that can affect millions of people both living in and out of that country.  The countries that are at the highest risk for not being able to pay back their loans are Greece, Spain, Italy, and Ireland.  The worst case scenario plays out when several of these countries default on their loans which causes investors to, in a moment of fear for more loss of money, pull out on further investments and trigger a colossal banking shock.  Another major potential issue would be if one of these nations were to leave the Eurozone.  This could lead to a decrease in the value of the euro and potentially the failure of many different banks.  This would yield huge financial losses for not only European countries but even the United States in the Euro-Dollar exchange.  As one can plainly see, this issue affects literally hundreds of millions of people (Eichler).

The first nation to really find itself in hard economic times was Greece.  As early as late 2009, the country was forced to openly admit that the country’s debt actually outsized the size of the entire economy of Greece.  This came as a shock but prompted investors to demand higher yields on the loans Greece had taken out.  To prevent an entire collapse of the economy, the European Union, EU, and European Central Bank, ECB, gave a series of bailouts to the country to prevent a total economic collapse (Kenny).  Greece’s debt still remains an issue today.  Its debt is estimated to be 165% of the country’s gross domestic product, GDP, while the projected GDP is at -3%.  Needless to say, the financial future of Greece remains an important issue for the Eurozone (Eichler).  

Unfortunately, Greece was not the only nation that needed to receive government bailouts.  Spain fell victim to a real estate bubble bursting which crippled the financial base of the country’s banks.  Spain received a large bank bailout, roughly 100 billion Euros, to prevent its economy from falling into shambles, however that is not the largest concern for the nation currently.  The problem with Spain is their unemployment rate.  The country hit 25% in the 3rd quarter of 2012.  This means that roughly 5.8 million people in Spain are unemployed.  Additionally, the Spanish government reports that the economy is in no real state to start growing anytime soon.  After shrinking by roughly 1.7% in the 3rd quarter of 2012, the outlook for the region is still grim (Thompson).

Since Spain received its 100 billion euro bank bailout, Italy has become one of the most worrisome financial members of the Eurozone.  The country has a debt of 2 trillion Euros, which puts it at higher debt than any other country excluding Greece and Japan.  In addition to being in massive debt, Italy is subject to the scrutiny of what happens to the Spanish economy.  It has gained the unfortunate stigma of being a nation that could follow what happens to the Spanish economy.  This worries foreign investors especially since Italy has consistently been known to be behind when compared to other EU nations economic growth.  In fact, Italy’s economy is projected to contract by 1.7% this year (Davis and Skoczylas).

Not to be forgotten, Ireland is also suffering from this European debt crisis.  Ireland suffers from major problems.  First, it has needed multiple government bailouts to keep its banks from collapsing.  The first bailout of 118 billion Euros was not enough to stabilize Ireland’s banks, so the country is in a position to now receive a second bailout.  Additionally, Ireland is fighting a growing battle with unemployment due to a shrinking economy.  The unemployment rate in Ireland has reached right around 14%.  With no real relief in sight, this has prompted many young Irish citizens to leave the country to look for work.  This creates an even larger problem.  Now the country has to fight a battle on three fronts.  First, the banks of Ireland are still walking a knife’s edge and could collapse at any point.  Second, the country’s economy is contracting and unemployment is rising.  And now, the youth of Ireland has lost hope and are leaving the country in the hopes of finding work elsewhere.  The problems for Ireland are adding up, and it seems that the nation is still a ways away from overcoming its debt.  The future for this nation is at a serious juncture (Pauly).

Though there are some nations that are very strongly affected by the debt crisis, not all in such dire circumstances.  One nation that has not been pushed to the brink of economic collapse in Germany.  Of all the nations in the Eurozone, Germany has the strongest economy.  They have, therefore, adopted a more authoritative position in handling the debt crisis for other nations.  Germany, though having a strong economy, has at much to lose as any of the nations facing economic hard times.  The strength of Germany’s economy comes from the fact that it can have cheap exports because it is grouped with the 16 other nations of the Eurozone that all use the Euro as a primary means of currency.  By keeping the cost of exports cheap, Germany has been able to keep its own economy flourishing.  The unemployment rate in Germany is a low 6.8% (Steiner).  Additionally, the debt as a percentage of GDP is lowest for Germany when compared to any of the other major players in the Eurozone.  Germany’s debt percentage of GDP is only 82% (much lower than Greece’s 165% or Italy’s 121%) (Eichler).  However, as noted, if the countries of the Eurozone were to collapse, Germany would suffer, as the value of the Euro would plummet.  This is why, in large part, Germany has taken the driver seat in facilitating economic relief to some of the nation’s struggling the most in this financial crisis.

Another country that has a different perspective on the debt crisis in England.  Because England does not belong to the Eurozone and does not use the Euro as its currency, the stakes are not quite as high for England as they are for the nations of the Eurozone.  However, a complete collapse would still have serious negative effects on the country and could have lasting negative outcomes.  England has, therefore, provided aid as best is can for this situation.  By giving funds to the International Money Fund, England has tried to give foreign aid to nations in serious financial trouble.  However, as a foreign investor, England has remained cautious and conscious of the fact that their money is not entirely safe when given to nations on the brink of complete economic collapse (White).

The European debt crisis is an issue that affects much of the world.  Even though the countries of the Eurozone are separate and have their own economies, they are bound together because they share a common currency.  Should the debt crisis not be solved soon, the effects could be devastating on a global scale.  A complete economic collapse would result in depressions in the immediate nations and a global recession.  Countries such as China and the United States have vested interest in this situation as well considering that the Eurozone consists of some of their largest trading partners.  The economic fallout of collapse very likely could shut down banks in nations that are not even part of the Eurozone.  It is, therefore, of the utmost importance that the world comes together on this issue and find a way to keep the struggling nation’s of the Eurozone afloat.  It is past the time of looking at what caused this mess and pointing fingers and passing blame.  Now is the time to unite and come together to solve this crisis.  After its resolution, we can look back and figure out what went wrong and prevent it from happening again.

Works Cited

Davis, Andrew, and Nadine Skoczylas. "Italy Moves Into Debt-Crisis Crosshairs After Spain." Bloomberg, Nov. 2012, http://www.bloomberg.com/news/2012-06-10/italy-moves-into-debt-crisis-crosshairs-after-spain-bank-rescue.html.

Eichler, Alexander. "The European Debt Crisis: A Beginner's Guide." Huffington Post, 2011, www.huffingtonpost.com/2011/12/21/european-debt-crisis_n_1147173.html.

Kenny, Thomas. "What is the European Debt Crisis?." About.com. n.d., http://bonds.about.com/od/advancedbonds/a/What-Is-The-European-Debt-Crisis.htm.

Pauly, Christopher. "Ireland Still Long Way from Overcoming Debt Crisis." Spiegel Online International, 2012, http://www.spiegel.de/international/europe/ireland-still-faces-problems-in-overcoming-debt-crisis-a-836758.html.

Steiner, Sheyna. "European Debt Crisis: Meet the Players." Fox Business, 2012, http://www.foxbusiness.com/personal-finance/2012/10/31/european-debt-crisis-meet-players/.

Thompson, Mark. "Spanish unemployment hits new peak." CNN Money, 2012, http://money.cnn.com/2012/10/26/news/economy/spain-unemployment-rate/index.html.

White, James. "UK's huge new euro bailout" As rescue talks collapse in chaos, our taxpayers face ANOTHER massive bill to prop up single currency." Daily Mail, 2012, http://www.dailymail.co.uk/news/article-2053456/Eurozone-debt-crisis-UKs-huge-euro-bailout-rescue-talks-collapse-chaos.html.