What is going on with the European economy?
Since the Credit Crunch, the European economy is cooling down and the weaknesses of the Euro start showing. The Euro is the sole currency in 17 countries of the European Union (with a total of 27 members), being Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain; totaling to some 332 million people.
The individual countries, though, are not bound to strict rules with respect to their national finances. That is, they can do whatever they want. One could visualize this situation as all of these countries sharing a single bank account, while each government is given an own debit card, without limit.
As a result of this construction, some of the economically weaker nations started to live at a high rate since the introduction of the Euro. Banks thought they could safely grant loans to these countries, as these were covered by the other users of the Euro.
With the international credit crunch, originating in the United States, interest rates got higher and the worldwide economy cooled down fast. Many countries had to invest large amounts of money in some financial institutions, as it would have damaged their economies even worse if these institutions were declared bankrupt. Thus, the hypothetical shared bank account was drained. Because of this empty account, credit rating agencies such as Fitch, Moody’s and Standard & Poor’s lowered the ratings of many European countries and the Euro as a whole. This situation results in the interests going up even more. There is a lot of criticism on these credit rating agencies, as they, according to some, make the situation worse than it had to be.
Fact remains that Greece is on the verge of bankruptcy, and Ireland and Portugal and to a lesser extent Italy and Spain are on a slippery slope that goes in the same direction. The European countries with a much healthier economical situation, mostly the northern and western European countries, have to fill up the now negative-balanced shared bank account, to calm down the financial market.
Many people are arguing to throw Greece out of the Euro, let them go bankrupt, or at least, don’t spend another penny on them. What these people do not realize, is that most European banks have investments in many other European countries, including Greece. In other words, doing nothing will mean that some of these institutions might go bankrupt, or will need to be saved by the governments. Besides that, doing any of these things would greatly damage the credibility of the Euro, possibly driving interest rates further up and other members ending up in the same situation Greece is in right now.
Furthermore, people say, the Greek have had the benefits, now let them bleed. In other words; the Greek need to be penalized for their financial misconduct. However, doing so will destabilize Greece’s and many other European countries’ economies even more. It simply isn’t possible to punish the Greek and save the Euro and Europe’s face at once.
Although understandable, the European countries should stop debating whether to save Greece or not. Every wasted day means more doubts in the financial markets, and therefore higher interest rates and larger debts for Greece. There should obviously be rules with respect to the financial situations of the individual countries, and how to deal with situations like this one. When this whole crisis is over, there might be a discussion on how to ‘punish’ Greece. For now, however, Greece should be saved. There is simply no choice.
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