The euro (€) is the official currency of seventeen of the twenty-seven members of the European Union, which are known as the Eurozone. Aside from these countries, five EU member nations accept and use the euro in addition to their home currencies. The total number of people regularly using the euro as their currency is estimated at about 332 million. The euro is also the second largest traded currency after the US dollar ($). As of February 2012, over €890 billion are in circulation globally. The Eurozone forms the second largest economy in the world. The current economic crisis has affected the Eurozone to unprecedented levels, and the future of the euro remains in question.
History of the Eurozone Crisis
In 2008, with the US subprime mortgage crisis, banks and leading financial institutions started to collapse and sovereign credit was the only available alternative. The European nations soon followed the lead of the United States. Since 2009, the Eurozone has been affected by a sovereign debt crisis due to the rising debt levels of member states. The downgrade of government debt in countries such as Portugal, Ireland, Italy, and Greece has raised concerns about the impending collapse of member economies. The Greek economy is currently classified as Selective Default by Standard & Poor's, the world’s leading credit rating agency.
Measures to Regain Stability
The European Financial Stability Facility (EFSF) was set up by the Eurozone member states to safeguard the financial stability in the region by authorizing loans and financial assistance to the member states when in need, and by borrowing for the collective Eurozone economy. The EFSF is a special support vehicle for these nations. Currently, the EFSF has been rated AA+ by Standard & Poor's. Besides setting up the European Financial Stability Facility (EFSF), a number of stringent measures have been commissioned by the European Council. Over 53.5% of the Greek debt to private investors has been written off and the EFSF has been raised to €1 trillion. The leaders of the European nations have agreed to a fiscal union and to the introduction of reformative measures in their budgets.
Standard & Poor Ratings
|State||Euro Adopted On||Current Standard & Poor Ratings|
|Austria||January 1, 1999||AA+|
|Belgium||January 1, 1999||AA+|
|Cyprus||January 1, 2008||BB+|
|Estonia||January 1, 2011||AA-|
|Finland||January 1, 1999||AAA|
|France||January 1, 1999||AA+|
|Germany||January 1, 1999||AAA|
|Greece||January 1, 2001||SD|
|Ireland||January 1, 1999||BBB+|
|Italy||January 1, 1999||BBB+|
|Luxembourg||January 1, 1999||AAA|
|Malta||January 1, 2008||A-|
|Netherlands||January 1, 1999||AAA|
|Portugal||January 1, 1999||BB|
|Slovakia||January 1, 2009||A|
|Slovenia||January 1, 2007||A+|
|Spain||January 1, 1999||A|
Excessive welfare spending has been at the core of the debt crisis. Malinvestments as a result of such spending have raised the deficits of countries such as Greece, Portugal, and Italy. Low interest rates resulting from the perceived strength of these economies, the expansionary policy of the ECB, and the bailout guarantee of the Eurozone may be to blame for the indulgent and unbridled government welfare spending. Deficit spending came as a natural consequence. To finance the difference between the expenditure and the revenue, governments such as Greece have been issuing bonds to the ECB and other banks as collateral against loans. This has resulted in increased money circulation in the Eurozone countries, and more importantly in a price increase in these countries. This also means that the sounder economies bore the cost of the deficits of weaker nations in the union. The Stability and Growth Pact (SGP), which could have acted as a restrictive barrier, has been completely ineffectual as no sanctions have ever been imposed against any member nation.
With public debts reaching alarming levels, the governments of countries like Greece are faced with troubling consequences. Paying back the debts by increasing taxes seems untenable as the economic framework would be threatened in such a scenario, which could eventually lead to further deficit. By imposing rigid financial reforms and adopting austerity measures, the governments face public wrath and stand to lose popular support.
A Loss of Confidence
The Eurozone was regarded as a safe economic zone prior to 2009. The bonds from states such as Greece, Ireland, and Portugal were deemed sound investments for both banks and private investors. The crisis revealed the weakness of the investments. Political turmoil in Italy and Greece have furthered the loss of confidence in the Eurozone economy by raising concerns about the efficacy of the governments to contain the crisis. A series of bailouts to the ailing economies have impacted the solidarity of the Eurozone. Greece was initially sanctioned a bailout of €45 billion by the IMF and other European countries. In March 2012, Greece was sanctioned a second bailout of €28 billion by the European Central Bank (ECB), IMF, and the EU.
The question that the Eurozone still faces is who will foot the bill for these malinvestments. The future of the euro as a consolidated currency could be in question.
As early as October 2011, Nobel Prize winning economist, Paul Krugman suggested that the ultimate solution to the crisis would be to create a fund that could finance economies such as Greece and Italy if necessary. But to put such a fund together, the European governments need to work cohesively and assure creditors of their credit worthiness. However, this seems a remote possibility since the crisis has raised doubts about the soundness of investment into these countries. "The bitter truth is that it’s looking more and more as if the euro system is doomed. And the even more bitter truth is that given the way that system has been performing, Europe might be better off if it collapses sooner rather than later", said Krugman in his blogpost titled "The Hole in Europe’s Bucket.”
Will the Euro Diminish?
A number of possible alternatives now present themselves. The formation of a smaller Eurozone is one possible outcome. Germany, Netherlands, Luxembourg, and Finland are the sturdiest of the Eurozone states. If these nations abandon the euro and readopt their former currencies or a new currency, the euro may be looking at a total cessation. This also means that other weaker economies would follow suit and readopt their national currencies. Such a scenario could lead to a legacy of international disputes over the euro contracts. In case the less robust economies persist in the usage of the euro, it is highly likely that the value of the euro would fall sharply and lose its current stature. If economies such as Greece and Ireland move to leave the Eurozone, the currency would face a sharp appreciation, but on a smaller scale. In March 2012, Krugman suggested that the best alternative for countries like Greece and Ireland is to leave the euro and for the ECB to take fiscal action, which would impose less austerity on the nations that are already facing high unemployment rates (50% in Greece and 30% in Ireland). This scenario remains unlikely considering that the economies that are greatly weakened by the crisis would profit most by remaining part of the Eurozone.
Stability and Survival
For the stable survival of the euro, the Eurozone nations need to reach a fiscal union that cuts across political and economic divides. The ailing economies such as Greece and Italy need to meet their fiscal targets and implement rigorous reforms in order for the euro to survive. To overcome the current fiscal deficit and to meet the liquidity needs of these nations the European Central Bank or economically sound nations such as Germany, Netherlands, and Finland could extend financial aid or loans. In such a case the EFSF may need to be expanded, and may include rigorous monitoring of individual state economies as well. This seems the only likely alternative to boost the vitality of the euro and to ensure its survival in its current form.
Dissent Against EU Cash Rules
Beginning in late February 2012, there were protests against the implementation of the severe austerity measures suggested by the IMF, the ECB, and the EU. Ireland announced a referendum on the new European budgetary rules. With Standard & Poor's giving Ireland's economy a ranking of BBB+, a number of severe austerity measures were imposed on Ireland by the EU. Now these have led to an outcry in Ireland and public dissent against the European spending rules. The stringent measures are likely to come into force despite a negative vote at the referendum. However, this may impact Ireland’s access to the EU bailout fund. In March 2012, the European Council, the head of the European states, reaffirmed a commitment to the Euro Plus Pact of 2011, a series of political and economic reforms intended to improve the fiscal strength of the member states. How far will the European nations go to maintain the solidarity of the Eurozone in the face of the current crisis?
Will the Euro Survive and Revive?