Thursday, 2 August 2012

When will the Euro Zone crisis end?

Euro crisis continues
After the banks were bailed out in 2008, Governments across Europe were left holding huge levels of sovereign debt. Each country's causes and strategy to deal with the emerging crisis, varied. However the interconnection between banks and national economies meant that none could easily escape. For example, by 2011, French banks were owed €300billion by Italian borrowers. A financial collapse in Italy would hit France like a financial Tsunami and so the financial contagion would spread.
The fatal flaw in the Euro was monetary union without fiscal union. It requires political control of nation states in order to enforce fiscal policies of taxation and spending. Yet Europe's voters faced with massive cuts and tax increases have strongly resisted austerity measures. Unemployment has climbed relentlessly, heading towards 18 million this year, a full seven million more without jobs compared to 2008 when the crisis first hit.

quick view chart
Euro 17 Area unemployment (in thousands)
Take Spain as an example of the entrenched crisis that will not go away. The fourth largest economy in the Euro zone regularly faces yields on ten year bonds breaching the 7% level, which is generally considered to be unsustainable. Even with another $65 billion of tax rises this month has failed to convince the markets that the medicine is sufficient to tackle the debt crisis. So it will be back to the European Central Bank (ECB), who will no doubt through gritted teeth find another bail out with even more onerous austerity demands. The ECB met today and President Mario Draghi hinted at new help for countries such as Spain but there was no details.
ECB President Mario Draghi
The voters will rebel and the markets will remain unconvinced. The vicious circle goes round and round. Sometimes the players change; Greece, Italy and Spain but it's the same old story.
So what is the answer? Until the sovereign debt is pooled together across the Euro Zone, there is no real end in sight for the crisis and the effect on the global economy. Otherwise, a dramatic incident such as a Euro exit by Greece could bring the currency to the brink of collapse. Now is the time for leadership in Europe.

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