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The Euro Crisis has become one of the most challenging economic problems today. With the world having witnessed major financial Crises in the 1930s and 2008, there is no doubt that the current crisis in the Eurozone has a network of intertwined causes and possible effects if current efforts to manage it are not successful. This essay analyses the interconnectivity of the crisis and current efforts being undertaken by global leaders to deal with the situation. To achieve this objective, articles from The New York Times Newspaper have been consulted for the purpose of having credible information about the issue.
The Euro Crisis
One major fact about the financial system of the world is its interconnectivity. This implies that a problem arising from a particular region of the world easily spreads to affect other parts of the world. This could be through a number of ways, including but not limited to contagion, collapsing economic activities, and contracted credit. According to Marsh, an editor of the New York Times Newspaper, “European Union leaders are meeting this week to at last deal with the debt crisis rattling investors worldwide … (March 1).” These leaders initially perceived lending to Euro countries as the best option in remaining free from the crisis.
How then are these issues intertwined globally? Many analysts believe that the current financial crisis began more than ten years ago when European countries unanimously agreed to use the Euro as the main currency of the region (Marsh 1). The implication of this was that all countries, including rich and poor, were allowed to borrow money at equally low rates. This created disparity as these countries had diverse inflation rates and levels of economic growth. This was to become a stronger incentive for these countries to continue borrowing without considering the impact, which was to come in more than ten years.
As described by Marsh in his web analysis, Greece suffered most from this borrowing crisis as it financed several public projects like welfare, piling up an enormous debt whose payment remains a milestone for the country to overcome. Due to its persistence, European financial institutions were pushed to agree on bailout programs in 2010 for Greece and other Eurozone countries like Portugal and Ireland (Marsh 1).
Nevertheless, these efforts were not enough as Greece’s debt exponentially grew, leading to pressure for government cutbacks that later resulted in civil unrest. This was not good news for countries like Germany with a fairly stable economy. Moreover, the fear of the impact of a Greek default on the entire region has contributed to continued bailouts. The best outcome for this situation would be that Greece pays clears its debts in the future.
However, the worst scenario likely to occur is having a defiant Greece that does not pay her debts, leading to inefficient bailouts from other countries in the region. For purposes of ensuring financial stability and avoiding a case where the Euro economy kneels, the option proposed by experts is to have other countries in the region erect financial firewalls to absorb the impact. As argued by the editor, “…damage could be contained if countries in the eurozone can erect a financial firewall…” (Marsh 1).
What if the firewalls don’t work? Arguably, this would have a significant impact on the entire region as a run on banks would definitely take its course. With the presence of a common regional currency, it would be easy for financial institutions and investors to seek financial heavens in countries with a better economy. With the absence of central banks in the region necessitated by the Euro, Kenneth Rogoff from Harvard notes that the situation makes Europe “the ultimate contagion machine” (Marsh 1).
If no actions are taken to deal with the situation, there is no doubt that a series of events are likely to take place and affect all Eurozone countries and spread to the United States, which is a major lender (Erlanger 1). Like other economies, American investors are getting worried about the future of Euro countries and the possibility of having a complete meltdown. As a result, they are moving their cash out of European banks to ensure that they do not become victims of the effects which are likely to affect a number of countries outside the Euro Zone.
As noted by Marsh, American financial institutions are less exposed to Greece as compared to other European countries like Ireland, Italy, and Spain (Marsh 1). Americans will definitely suffer if the Euro economy crumbles. This is because of the business ties which exist between the European Union and the United States. With huge American exports being consumed by European countries, the US would be quite disadvantaged following the depreciation of the Euro against the Dollar in terms of exchange rates.
It is argued that unless foreign bailouts are huge enough to cover the current financial deficit, the looming trouble would be undoubtedly unimaginable. Economists give a maximum estimate of $2.6 trillion as the amount which would be required to stabilize the region’s weakening economy. In comparison, this value is higher than the G.D.P of Spain and more than half the German economy. Last year’s bailout was too low to stabilize Euro’s economy, as indicated by Marsh, “The fund has only about $600 billion on hand” (Marsh 1). Compared to the needs of each Euro country, the amount fell below a considerable threshold as Italy required $837.5 billion, Spain at 643.2, and Greece at $120.8 billion, among others (Marsh 1).
While efforts have been beefed up to salvage the European economy, there are challenges that experts continuously face. Bank and government secrets have become unknown crises posing immense interference with the rescue mission. The question of who is exposed to the bad debt more than the other remains unanswered, with speculators indicating that most American big banks are at risk (Marsh 1). Is this bad debt insured? A likely possibility would be credit default swaps, leading to big losses being felt by those who have invested in Euro markets.
Another unknown is whether Greece has insured her debts. Although bailout is necessary, the involvement of other bigger economies remains uncertain. This means that no one knows whether China and Saudi Arabia would be willing to be part of the expected bailout fund. “Chinese exposure can only be guessed; whether China will participate in bailouts is uncertain” (Marsh 1).
With the Euro Crisis appearing resistant to simple solutions, Euro leaders have no option but to deal with the problem head-on. The pressure is mounting on these leaders to provide solutions as soon as possible. Herman Van Rompuy notes that there is still pending work, which will be finalized during the Euro zone summit in early November. “Further work is still needed, and that is why we will take the decisions in the follow-up eurozone summit” (Erlanger 1). The crisis has been acknowledged by Donald Tusk as having reached worrisome levels that needed steadfast actions. This urgency was necessitated by the worsening Greek situation that is attracting riots and rising borrowing levels for Italy and Spain (Erlanger 1).
Based on the above analysis, it suffices to double emphasize the interconnectivity of the impact of the Euro Zone Crisis. Even as pressure mounts on the need for Euro leaders to take immediate actions, other leading economies outside the region remain uncertain about the ultimate impact of the crisis on the global economy.
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Erlanger, Steven, and Castle Stephen. “European Leaders Deal Directly With Debt Dilemma.” The New York Times. 2011. Web.
Marsh, Bill. “It’s All Connected: A Spectator’s Guide to the Euro Crisis.” The New York Times. 2011. Web.