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What is going on with the European economy?

Updated on October 1, 2011
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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.

Source

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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    • Robin Oatley profile imageAUTHOR

      Robin Oatley 

      7 years ago

      Is it worth saving and restoring the financial gambling casino?

      We have no choice. Because if we don't, our 'chips' become worthless. After all, the exchange rate of the Euro is going down for months now. And Greece (or any of the other financially troubled countries) hasn't even defaulted yet.

      If countries and banks start collapsing, the value of the Euro will crash. People will lose all of their money and their mortgages, trade with non-EU countries will become extremely expensive, etc. I'm not sure that is a direction one would want all of Europe to head in.

      You are absolutely right in saying that the system is crooked and that it needs to be changed, but letting it crash makes things totally unpredictable. It would, in my opinion, be better to change it in a more slow and considerate way, to be (a bit) better able to control the concequences.

    • CHRIS57 profile image

      CHRIS57 

      7 years ago from Northern Germany

      Interesting hub and discussion.

      All this is not about saving Greece or P or I or... It is about saving banks, saving the financial system. And the question is: Is it worth saving and restoring the financial gambling casino?

      Economies in Northern Europe run trade surplusses and current account surplusses. Actually a current account surplus is nothing elso but money earned in an economy but not invested or consumed in said economy. If this goes on for years, people in the surplus economies never see benefits of that money earned, only banks with their investments abroad benefit.

      With that in mind, i can´t see much damage coming to real economy, real life if Greece has to default. That will certainly shake up the banking system, with the result of Greece failing and some banks defaulting.

      But why would banks have to default? In the past years, standards for liable equity in banks have been raised continuously. So a bank in trouble today has to declare bankruptcy much sooner than it had to do some 20 years ago. Doesn´t that cripple the ability of today´s banks to react appropriately in crisis situations?

      Hasn´t politics itself created a situation where banks are immediately declared "too big to fail" and not let go and weather economic storms?

    • Robin Oatley profile imageAUTHOR

      Robin Oatley 

      7 years ago

      Well, it is probably not very nice to be crippled by the IMF and/or the EU, but it would mean a great destabilization of the entire European economy if they would go bankrupt. Numerous European banks have investments in Greece, and by defaulting/bankruptcy all of those would lose a huge amount of money.

      But then again, defaulting is not a very pretty thing either. The government would be left with no money at all, and public services such as healthcare, police, etc. would probably be shut down. Bankruptcy would therefore also politically and socially destabilize a country.

      Greece doesn't want to lose its position in the Euro and the European Union, because since they are one of the less prosperous countries in the Union, they recieve many grants. By leaving the Union, they'll lose these privileges, and that is not something they'd want.

      Banks are not like just any business. If your bank collapses, you have just lost all of your savings. And with you many, many others (as opposed to if your supermarket would collapse, you'd just go shopping somewhere else). This would mean social unrest and people with other banks cashing their savings, thus having other banks collapse as well, causing many people to lose their money. I think this bank-issue is the same as with Greece, you cannot save them (and yourself) and punish them at the same time.

      Are you suggesting that we should let all less prosperous countries and most banks default, just like that? If the things i said above would happen in all of these countries, that would mean a real disaster.

    • AngelTrader profile image

      AngelTrader 

      7 years ago from New Zealand

      Greece would be far better defaulting. How is it in their sovereign interests to become financially crippled by the IMF? Ireland went down that route and are stuffed as a nation. Britain used tax payers money to bail out failing banks, why?

      Why are banks deemed so special they are saved from collapse while another business is allowed to go under? And then the banksters paid themselves obscene bonuses! It didn't stimulate growth or jobs just ensured a criminal elite continued fleecing more money from the poor. The money the British government used to bail those failing institutions out with would of paid all the mortgages in the country, everyone would then be debt free.

      Countries should default and then allow the market to dictate the fate of the banks. They created this crisis and they should fail as a result.

    • Robin Oatley profile imageAUTHOR

      Robin Oatley 

      7 years ago

      Thanks, HSchneider! In every European parliament, there is a discussion going on about supporting Greece or not. Some Euro-sceptic and/or populist parties are shouting: We're not throwing any more money in that bottomless pit! People believe them, follow them and vote for them, none of them realizing what will happen if Greece goes bankrupt.

      Democracy is a great thing, it is just a shame that people sometimes have no idea how high the stakes actually are.

    • profile image

      Howard Schneider 

      7 years ago from Parsippany, New Jersey

      Very well said Robin. A plan to save Greece is essential along with an emergency plan to deal with all of Europe. The alternative would be a total collapse of the banking system which will hurt everyone. Great Hub.

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