Eurozone equals zero-zone?

The European independent debt crisis is one of the biggest stories of the year, maybe of the decade and if there are no changes to be made it would certainly be one of the century. After the crisis some economist’s minds are programmed in such way that when they hear the words debt, crisis or Europe in the same sentence they automatically think of Greece.

The simplest way to explain the debt crisis the Euro Zone is experiencing is that some of Europe’s member countries just have too much debt with the risk of not being able to pay it back.  This will result into one or more of the Eurozone countries dropping out of the bloc most probably causing a rash of national bank failures that will spill over to the United States of America in only a matter of time. Businesses and the community would then not be able to apply for loans because of the crisis, leading towards a declined action in short term and long term growth. The European debt crisis has a spillover effect on the world, and if the current situation worsens, it will cause depression in Europe and recession in America. Then the idiom of “If America sneezes, the rest of the world catch a cold” must seriously be taken into consideration.

Portugal, Ireland, Italy, Greece and Spain are all gathered under the unfortunate acronym PIIGS. These are some of the most highly leveraged Eurozone countries, and most people think that if a disaster happens, it will start with one of them. Italy’s debt is 121 percent the size of its economy. For Ireland, that figure is an 109 percent. In Greece, it’s 165 percent.

Now that the size of the PIIGS’ debt has become clear, investors are getting more reluctant to buy bonds from European countries, since many of those countries are heavily in debt and the ones that aren’t in debt look like they might have to assume responsibility for the ones that are. Investors don’t want to put their money into bonds if they think they might not eventually get that money back. And governments in Europe have a lot of debt and not much money and it’s not clear how they’re going to correct this.

Blame often gets cast on the “irresponsible” countries who borrowed too much, taking advantage of the low interest rates available to all euro member nations. However, many argue that it’s not right in all cases to blame indebted governments for their own situation, since not every country with high deficits actually engaged in reckless borrowing.

Europe is basically trying to do damage control. European Union authorities have put together a funding package of 150 billion euro for the International Monetary Fund to disperse to debt-stricken Eurozone nations, and many countries are using inventive asset-juggling tricks to get capital into their banks without officially bailing anyone out.

Eurozone authorities drew up a tentative proposal to enforce stricter consequences on countries that borrow beyond an agreed-upon limit. The deal would also require Eurozone nations to balance their budgets, and aims to bring members of the currency bloc into greater sync from a fiscal standpoint.

Some people argue that an orderly, controlled Eurozone break-up would be a good thing for certain struggling debtor nations. Still, even this relatively nonthreatening scenario carries economic fallout for Europe and maybe beyond. The Eurozone breakup would do more harm than good to their current situation and if it breaks up indeed, but according to, BBC News (http://www.bbc.co.uk/news/business-13856580) economist argue that the entire Europe would suffer because of one or two countries downfall. This would then have a spillover effect to America and the rest of the world.

 

J.Steenkamp

4inmore

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