The euro was meant to unite seventeen out of twenty seven European countries in the EU in collective prosperity, promoting Federalism. The euro was introduced into the international financial market on January 1, 1999. As of 2009, the euro has been in an extreme debt crisis, constantly at risk of recession. Escalating the crisis is its high position in world affairs; it is the second most traded currency and has the highest combined value in circulation. Several measures, such as the European Financial Stability Facility, have been put in place in a desperate attempt to give financial assistance to countries in trouble; it had originally borrowed 440 billion euros and 250 billion remained after the Irish and Portuguese bail out.
Although this has been perceived as a problem for the euro nations as a whole, the problem is actually primarily concentrated in Ireland, Portugal, and Greece. Of particular current interest is the impact the crisis in the Eurozone (an economic & monetary union within the EU) is having on Greece. The problems first began when investors became worried that Greece would be unable to pay off its debts due to an increase in government debt. That's when money began flowing out of the country because people who had money in Greek banks began to worry about the possible devaluing of their money and property. From that point onward, Greece has been unable to increase confidence in their market (which means that they are unable to get people to buy or sell or invest). 4 billion euros have flowed out every month since 2009.
This flow has picked up in the wake of Greece's political uncertainty; they have not had a central government in over a week and are instead in a transition period. Their next election will be in June. One political camp desires a renegotiation of the current loan deal with the EU; the other is keen on keeping the euro and completely demolishing the loan deal. Until the elections on May 6, money had actually begun to flow back in. This political uncertainty is accompanied by the looming specter of a Greek default, a default that may be in the near future and is getting vastly different opinions. A Greek default would mean that those who had assets in Greece would have their accounts frozen and converted to the drachma, which has a significantly lower value, compared to the euro.
In a Greek default, Greece would be hardest hit but it could result in a return to recession of 2008 and prove deleterious to the European banking system as a whole. It could also start a ripple effect in which Irish and Portugal also avoid payment of debt and default themselves. Greece's inability to solve their crisis has been in part because of cutting public spending too early. By doing this, their economy has contracted and they have essentially been borrowing more money to pay off creditors. It was essentially a way to buy time to solve their problems. Unemployment is now 16% and the deficit grew 13% in the first five months of this year. It seems inevitable that Greece will be forced to default but some experts believe default may not be quite as bad as it seems.
Stuck between a rock and a hard place, they say that it is better that lenders lose money than an entire population. To increase economic prosperity (in a shorter amount of time) would also mean devaluing the currency in the short run but that is impossible if Greece is part of a group. Time will only tell what happens.
Articles I Used:
http://www.forbes.com/sites/timworstall/2012/05/15/why-greece-should-default-and-leave-the-euro/
http://www.nytimes.com/2012/05/17/world/europe/greece-teeters-ahead-of-new-vote.html?_r=1&ref=euro
http://finance.fortune.cnn.com/2011/06/17/end-of-the-line-what-a-greek-default-means/
More Perspective:
http://blogs.telegraph.co.uk/news/nilegardiner/100158147/why-greeces-economic-collapse-is-a-nightmare-for-barack-obama/
http://ajw.asahi.com/article/economy/business/AJ201205160024
http://www.csmonitor.com/Business/2012/0516/How-Greek-economic-woes-could-help-US-consumers
http://www.athensnews.gr/portal/11/55561
- I'm sorry this is so incredibly long but I needed to get all the background because this isn't what most people consider "light reading"
No comments:
Post a Comment