Beginning in 2009 the global economy experienced the most severe recession in the last 50 years. Initially spurred by the financial crisis at the end of 2008, when Lehman Brothers filed for bankruptcy, private capital slowed and global trade contracted. This led to the decrease in the Gross Domestic Product for many developing countries, yet their overall deficits increased. Many of the members in the European Union have been slow to recover from the economic fall-out. Several countries, in fact, are still heavily in debt. The EU uses the acronym PIIGS when referring to these troubled countries: Portugal, Ireland, Italy, Greece, and Spain.
Greece is by far the worst off in comparison to the other EU members. In 2009, the country reached record level debt of 113% of their GDP, or 300 Billion Euros, which was forecasted to rise to 125% by the end of 2010. After refusing assistance several times, Greece finally requested a bailout package from the EU in May 2010. It was granted to the tune of 110-Billion Euros. However, due to the conversion from the Greek Drachma to the Euro, the country was faced with severely large increase of their national debt. Greece amassed a deficit equal to 13.9% of their GDP – the highest in modern history!
Because of the rising anger over government corruption and mismanaged spending, the EU took a hard line with Greece when they requested a second bailout package earlier this year. There is speculation that if adequate changes are not made, Greece will be the first country forced to leave the Eurozone. Thus, the country agreed to take extreme austerity measures in an effort to curb spending and drastically reduce their budget. Not only will the plan cut spending by 14 Billon Euros, but the government will raise taxes in hopes of producing a similar amount in revenue over the next five years. The citizens of Greece have been outraged by these measures for months because they feel the changes will not improve the welfare of the country, prompting the need for a new government to be sworn into place in conjunction with the implementation of the the austerity measures. Much of the public sector will be affected as some employees have been forced to take a 15% cut in pay, while 80,000 others have been asked to leave their jobs, ultimately adding to Greece’s already sky-high unemployment rate.
Protests broke out in June when the government revealed a plan that would cut healthcare, education, defense, and social security benefit spending. The plan also raised the retirement age to 67 for benefits (a dramatic change from the current age of 50). To help offset the burden from the citizens, the plan proposes selling 10% of the government’s telecom shares to Germany. As the Irish Republic and Portugal have subsequently been granted bailout packages, there has been additional economic fall-out in the EU as the Italian and Spanish governments need the EU to buy bonds to try to bring down their borrowing costs. Protests became even more violent in October when the measures were finally voted into place by Parliament.
There is added concern that the bailouts will ultimately affect the US Economy because the countries that are assisting in the bailout will now have less money to spend on American goods, causing more layoffs here. With the recent news of Italy’s equally massive economic failures, many argue that infusing more money into an inefficient economy will not solve the underlying problem of decreasing the overwhelming debt that these countries have incurred. Many economists are now arguing for the elimination of the euro in order to help salvage the depressed economies. It leads to the question: do the benefits outweigh the consequences of maintaining one uniform type of currency in the emerging global economy?
Once touted as the savior of Europe, the majority opinion seems to be turning in the direction opposite direction and there has been suggestion that the PIIGS would fare better if they were accountable for their own fiscal and monetary policies to boost their economic recovery. Paul Krugman made the case in Thursday’s New York Times article that if governments are unable to borrow against their own currency, they will incur higher interest rates than countries that retain the ability to print their own currency in times of financial crisis. By parting from the Eurozone, Greece could regain control over its own economic future. While the country will suffer from austerity measures either way, but there is less likelihood that the entire Union would suffer if Greece defaults on their loans because the bailout money would be better spent on recapitalizing the countries with stronger economies.
This leaves the EU officials concerned about whether all countries with weak economies will leave the monetary union. Italy is the next in line to default as they were pushed this week to the brink of bailout that the EU currently cannot afford. The funds are currently tied up in assisting the battered economies of Greece, Portugal and Ireland. Sky News reported that while Italy is better off now that Berlusconi resigned bailout, should the EU be able to dictate government policy in countries that use the Euro? Being involved in economic and business policy has proved disastrous thus far. Austerity measures have not worked thus far to help countries out of recessions, yet Portugal is faced with protests this week that are supposed to help them cut spending enough that they do not default on their loans, much of which will affect France if they do.
In his report “Crisis in the Eurozone and how to deal with it”, Paul DeGrauwe states that the only way to effectively control the monetary policy within the Union means that the members have to agree on political policy as well. In effect, all of the countries with the same monetary currency need to have a centralized government. This is not something that most citizens in the EU would readily vote for, as this would cause drastic changes for some of the current welfare vs. non-welfare states. After hundreds of years of separation, it is hard to predict the outcome of uniting 17 different and unique forms of government and will also abolish the freedom each country currently has over public policies and how they conduct business in the global market. If Europe were to adopt a central government, just for the sake of retaining one singular monetary unit, what is to stop the rest of the world from doing the same?
From a business perspective, it is better to maintain a diverse portfolio in order to retain a competitive edge in the marketplace. Countries will fare better in the global economy if they continue to trade the items for which they have a competitive advantage. Moving to one unit of currency, or one centralized political movement will strip countries of a competitive edge and dilute the market place of choice.
Krugman, Paul, “Legends of the Fail”, New York Times, November 10, 2011
“Berlusconi Quits After Austerity Package Vote”, Sky News, November 12, 2011, Updated November 13, 2011, Retrieved from: http://news.sky.com/home/business/article/16108875
DeGrauwe, Paul, “Crisis in the Eurozone and how to deal with it”, Center for European Policy Studies, No. 204, February 2010, Brussels
Other Works Cited
(1) BBC News, “Timeline: The unfolding eurozone crisis”, Updated August 8, 2011, Retrieved from: http://www.bbc.co.uk/news/business-13856580
(2) BBC News, “Greek Government Austerity Measures, Updated June 30, 2011, Retrieved from: http://www.bbc.co.uk/news/business-13940431
(3) Katrandjian, Olivia, “Greek Debt Bailout could affect the US Economy”, ABCNews.com, June 19, 2011, Retrieved from: http://abcnews.go.com/Business/greek-debt-bailout-affect-us-economy/story?id=13879426
(4) Kakassis, Joanna, “Saving Greece: Can New PM Lucas Papademos Save Its Economy?”, Time Magazine, November 11, 2011
(5) Schuman, Michael, “Greek PM Ditches Referendum: Should Greece Lose the Euro?”, The Curious Capitalist Blog, Time.com, November 3, 2011, Retrieved from: http://curiouscapitalist.blogs.time.com/2011/11/03/should-greece-ditch-the-euro/
(6) The World Bank, “The Global Economy in 2009”, 2010 World Development Indicators, Part 4: Economy, pp. 217-218 updated April 2011, International Bank: Washington, DC