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Crisis in Europe(I)

Updated on January 19, 2012

Run for your!

As the complexity of the current situation is hard to be explained in a single hub, I’m going to split this in more hubs that will hopefully cover the facts and situations leading to current situation. After that, as things progress in Europe and around the world, I will try to explain the impact and make some prediction about how the situation will develop. In this first hub I will try to make a short review of the main factors that lead to what is happening today in Europe.

The beginning:

What we have today in Europe is a crisis of trust. Trust in the capacity of states to pay their debts. But how exactly that happened, is the big question. It all begun from two categories that are today most hated around the world: the bankers and the politicians.

A decade ago, the developed countries with little exception were in full economic boom, mostly because the technology advancement that increased productivity. In Europe, an important factor was also the advancement of European Union, introduction of euro currency and removal of protection taxes that provided a significant boost for economies inside European Union to advance. The irony is that one of the most important moves, introduction of unique currency, is proving today to be one of the biggest vulnerability. Why? Because the Union was stopped at a monetary level, when the correct course of action should have been the continuity of consolidation at fiscal and structural levels. That was the number one fault of the Eurozone. To understand correctly this issue I’m going to explain a little that concept with the obvious example: Greece.

The biggest issue of Greece today, is not that they are lazy and aren’t paying taxes, but is that they adopted euro without being prepared. If your economy isn’t as productive as others you have, at macro level, couple of ways to deal with that. One is excessive taxation on other country products in your country and the other is depreciation of your currency. So, what is happening in Greece? Well, after joining the European Union, they couldn’t apply excessive taxation on the products that came from the other members of the Union because is forbidden according to Union law. After joining the Eurozone, they couldn’t depreciate their currency anymore, so basically they applied their internal economy a decisive blow.

Another problem caused by politicians is government against economical laws. Best economical advice is to act anti-cyclic. To limit the excess during economic expansion and to make reserves in order to use those during economic contractions. Unfortunately, as always, best advice is usually useless, because politicians have their own agenda. And that is to remain at power as long as they can. So, whenever is possible they throw some money to their citizens (voters). The problem is of course that once you gave something is unlikely to be able to take back at a later stage (some constitutional issues). For example, if you vote an increase of pension with 50% and lately you decide that you don’t have the money to pay that and decide that you should come back to previous stage, people will probably win in instance against you. Laughable but nevertheless true.

The third problem was, you guessed, banks. During economics peaks, banks are acting crazy, overheating the economy pumping money that are not covered with anything, just in the name of God almighty – THE PROFIT. As shareholders press for more profit, new complex products made just for profit, were released on the market. Derivative, Subprime, CDS and other toxic banking products were practically money without real coverage, a time bomb that eventually blew up in a poison cloud that spread around the globe.

So, there you have it boys and girls, the most important factors that provoked what today is known a crisis of trust.

· Politicians

· Banks

Of course, there were other factors that fuelled up the situation, like rating agencies to name just one, but that will be explained in the future hubs.


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    • Catalin79 profile image

      Catalin79 6 years ago from Bucuresti

      Thank you; you are correct, one of the solutions is deeper integration and rennouncing some prerogatives to European Council in exchange for eurobonds; however, neither Greece nor Germany and other countries are willing to go there yet and even if some consensus is reached it requires enormous amount of time to prepare, time that Greece just doesn't have. But more about that in a future hub;

    • CHRIS57 profile image

      CHRIS57 6 years ago from Northern Germany

      Well summarized, thank you.

      It is very true what you write. It does not help to haircut public debt in Greece, if the productivity gap is too large.

      Greece can only overcome this by leaving the club or by Greece and all other not so productive economies to follow suit and give in fiscal sovereignty to eventually receive Eurobonds.

    • Catalin79 profile image

      Catalin79 6 years ago from Bucuresti

      Thank you very much for your appreciation and surely could use your help in text editing; as english is not my native language, I usually do small mistakes; I hope though that this isn't affect much the quality of my hub as I'm trying to provide interesting content to my readers;

    • lmmartin profile image

      lmmartin 6 years ago from Alberta and Florida

      Thanks for the explanation. (I do hope the small grammatical errors do not result in your hub being flagged (as seems to be happening more and more) as it is an excellent introduction to the current crisis, something we all need to understand. (If I can be of help with editing, feel free to get in contact with me.) Lynda