A Layman’s Guide To Eurozone Crisis… What’s All The Havoc About?

As the Euro zone debt crisis heats up to volcanic temperatures, opening avenues for greater financial instability in the region, it is important that the issue is properly understood.

Obviously, it is not something that happened overnight. There have been rampant violations, responsibilities, mismanagements and discrepancies on different levels that have collectively contributed to the crisis. Moreover, economists make it too difficult to understand what exactly the issue is by loading it with heavy terminologies.

Here is an easy Q&A session that can help us understand what exactly the Eurozone Crisis is:

Q. What actually caused the Eurozone crisis?

There are three prime reasons for the crisis. First one being the ballooning amount of debt, in the form of exceeding borrowing limits, and too much money provided to financial institutions by the private sector.

Second being the affiliation of uncompetitive economies to one ‘too strong’ currency.

And third is the lack of a proper regulatory fiscal authority that could ensure proper enforcement and supervision.

Q. Who is to be blamed for the crisis; the government or the private sector?

A bit of both! Statistics prove that both sectors are responsible for the gigantic build-up of debts. However, it is the private sector with their irresponsible and disastrously mismanaged policies that are to be largely blamed.

In France private sector debt from 170% in 2000 jumped to 224% in 2010. Italy from 126% settled at 181%. Spain recorded the highest rise from 187% to whooping 283% over a decade.

Moreover, the high level of private spending was accompanied with an extraordinary low interest rate which further mounted the level of debt.

Q. Which state emerged as the cleverest economy of Eurozone and why?

The award undoubtedly goes to Germany.

Germany, unlike other states was able to play intelligently. When states like Italy, France and Spain were busy making imports Germany decided to develop itself as the export house of Europe. Hence, it was selling more than most of the world and thus, was able to earn a lot of surplus cash in the form of exports.

Another important point that removed German from the crisis equation was that unlike other states where wages skyrocketed, the German Union was able to hold them steady. Therefore, contrary to other countries of South Europe, Germany has been able to conserve its competitive price advantage.

Q. And what are the problems that resulted from the crisis?

• Higher interest rates on indebted countries already in the state of crisis.

• Reduction in government spending which will slow down the process of economic growth.

• States trapped in a vicious cycle of debt and instability.

• Market turmoil to boil over into the banking sector resulting in bank runs and market seizure.

Q. Can the Eurozone crisis be solved? What are the hurdles?

Not even a single state out of the 17 has had a clear overall objective to resolve the crisis. There is a complete absence of unanimity when it comes to dealing with debt. The debt must either be paid, forgiven or inflated away.

If it is to be paid, someone must get ready for the sacrifice of a lifetime, and no one is willing to do it, especially at present.

If it is forgiven, it will be investors and bondholders who will suffer in terms of the returns they expected to make. The option of inflating away the debt can only be made by the Central Bank and European Central Bank has made it clear that this option is off the table.