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Eurozone crumble, from glory to demise

At the sophomoric age of 7, I distinctly remember the pocket money of £5 per week that my father used to give me. I would ardently wait for Saturday to arrive so that I could receive my weekly salary, simply for being the hideous brat I was at the time. Having watched the traditional dose of children’s morning trash television and completing my weekend homework, I would go out with my mother and spend the entire £5 on either the latest ‘WWE’ wrestler action figure or a bag full of confectionary.

Wait a minute! ‘’No saving?’’ I hear you all cry (!). Well in those golden Thatcherite years, the youth didn’t really think about saving much in the UK – not only in the school years at all, but not even in their late twenties to much surprise. And why on earth would they? The UK economy was booming, unemployment was at its lowest in living memory, banks were flourishing, Eurosceptics were in power and Elton John had a full set of hair! What more could one want? The UK and Europe (now known as the European Union / EU) was on target to take over the world.

But, erm… Something didn’t go quite according to plan, did it?  We have all heard about the global financial meltdown and how greedy banks (namely at Wall street) have destroyed the livelihoods of millions across the world. We have seen balding politicians on the news rabbiting on endlessly about economic gibberish that sounds like Hungarian lovemaking to the average man on the street.

So, what went wrong and who is to blame? Or, the more intriguing question; why is a loaf of bread now more expensive than my German car?

At the time of writing this piece, the German chancellor, Angela Merkel, breathed a sigh of relief after receiving a majority vote in parliament so that Germany could deliver a further bailout package for Greece’s economic problems. (Just in case you’ve come back from a lazy holiday in Scotland – we are in the midst of what we call the ‘Eurozone crisis’).

What does this mean? Let me lay down the facts for you and keep it as simple as possible. Europe and neighbouring partners are in big trouble, due to the fact that most governments are spending more than they earn. It’s as simple as that. So, when they run out of money, they borrow more from lenders. However, lenders need to feel assured that the countries/governments that they are lending to – can pay them back in full. Yet, when this is not the case, as it is now – then the repercussions are huge. The debt increases since, when they run out of money, countries ask for emergency loans.

To put things in perspective, Greece asked for €110 billion in May 2010, €85 billion was given to Ireland in Nov 2010, and €78 billion was required by Portugal in May 2011. Total Greek debt is now standing at a whopping €340 billion, i.e. approximately €31,000 per person, whereas the average Greek salary was €25,915 in 2008. These are worrying statistics, especially for those who have just left university, having amassed a mountain of student debt before even starting their careers.

The main problem lies with governments trying to fund their debt with taking on more debt! I find the vicious circle quite baffling as I would rather downgrade to sharing a rented studio flat in a council estate in East Norwich, than borrow more money from my friend Daniel to whom I already owe money for paying my parking tickets.

However, why should we worry about Greece and its problems, and who loses out if Greece can’t pay its debts?  Well, lets see; France, Germany, UK, USA, Italy, Japan and Spain just to name a few. The pressing issue is the immediate domino effect within the Eurozone. It is a widespread belief within the EU that if one country leaves the Euro, and if Greece defaults on its debts, then the others will follow like a contagious disease.

The Euro was originally set up as a single currency for the European Union members, with the aim of boosting trade & tourism within the EU and of smoothing out economies, but it hasn’t unfortunately enjoyed much prosperity. The UK refused to join mainly due to sovereignty issues, but is still nevertheless affected by the crisis.

European lenders, such as banks and other institutions, are under particular pressure to provide long-term stability for the Euro. A further expansion of the European Financial Stability Mechanism (EFSM) has been suggested, but that may take some time as changes drawn out earlier in the year have still not been approved by national parliaments. The issue of eurobonds, which would make the debt of each country guaranteed by all, has also been rebuffed. We must bear in mind that taking responsibility for other countries’ debt may prove politically unpopular in countries like Germany, as it was in the UK to some extent. The only other solution would be that lenders could focus on greater losses in the private sector. Meanwhile, the burden has fallen on central banks, which are under immense pressure to propose additional quantitative relief in the form of printing more cash to increase the amount of credit in the economy.

This economic instability has been highlighted on the world financial stock markets as since July 2011 alone: London’s FTSE 100 has fallen 14%, New York’s Dow Jones has shed 15% and Germany’s DAX has dropped more than 29%. These are uncertain times for the world’s prominent ‘superpowers’. Many of the citizens of the so-called wealthy ‘western’ countries are questioning their own decision-makers, asking them why they are bailing out other countries when they themselves are unemployed and facing gross financial hardship domestically. There was a similar uproar in the UK when a small lobby group took to the streets over a £3.2 billion aid package that the UK gave to Ireland, citing that they were their closest trade partners.

The uncertainty about economic growth has also triggered worries about the indebtedness of eurozone states. If economies are not growing much, then this causes tax receipts to fall, making it harder for governments to pay off their debts. Recently, Italy became the latest eurozone country along with Spain, Portugal, Ireland and Cyprus to have its credit worthiness downgraded by ratings agency Standard and Poor’s, highlighting blatant concerns with its ability to pay its debt.

Earlier in July, EU leaders agreed a second bailout deal for Greece, and also agreed more powers for the European Financial Stability Fund to help countries struggling with debt. This would allow the fund to buy government debt, which is essentially bonds, offer credit on favourable terms to countries in crisis and would initiate a mechanism for recapitalizing banks. The deal comprised an initiative by private banks to swap existing Greek debt with longer term debt paying considerably lower interest.

However, the proposed plan has not yet been approved in the European Parliaments and there is a lot of skepticism that the project is insufficient to tackle potential problems in larger economies such as Italy and Spain. Furthermore, in order to prevent borrowing costs from increasing day by day, the European Central Bank (ECB) has been buying Italian and Spanish government bonds to try to bring down their borrowing costs. This resulted in the yield on Spanish and Italian long term bonds falling shortly afterwards, but these tactics by the ECB are seen as only a temporary fix for the major problems.

The stark fall in shares have frequently been led by bank shares as investors are concerned about the amount of eurozone government debt they are keeping, and whether this will be repaid or not. Many banks in France are facing the crux of the pressure since they hold more than €40 billion euros (£35bn) of Greek debt, roughly quadruple the amount of any country. A global trade body called the Institute of International Finance, which represents big lenders, has said the Greek debt swap deal technically means a loss for Greek lenders that equals 21% of the market value of their debts. If banks were forced to accept similar or greater losses on the debts of other countries, it may potentially erupt a new banking crisis that would plunge the global economy into deeper crisis.

To add further pessimistic injury to the situation, we recently learnt that the USA’s AAA credit rating was also downgraded to only AA+, even though it did not default on its commitments. It was a jolly good piece of Sunday evening television when we saw the US President literally begging all of his cronies to agree on an aid package to save them from defaulting. It kind of reminded me of watching The Muppet Show or Spitting Image when I was younger. Anyway, following those embarrassing near-defaulting times, US President Barack Obama has unveiled a $450bn ( about £282bn) package of tax cuts and spending plans aimed at creating jobs and boosting the economy. However, once again these ambitious plans will no doubt face huge trouble passing through the US Congress, as seems the norm nowadays.

To paint an even grimmer picture of the US economy, we can analyse that the US government reported no new jobs in August for the first time since 1945, with unemployment remaining at 9.1%. Furthermore, the US Commerce Department revised its growth figure for earlier in the year down to an annual rate of just 1% between April and March, after its initial rate of 1.3%.

So what is to be done? It’s an interesting waiting game to see how things will unfold and whether governments are generous enough to help one another out in the formats described above. An even more startling and surprising solution was an aid offer by the least expected country namely China. It was heartwarming to see that China had recently suggested it would offer financial help to Europe and its western counterparts if the need arose, but obviously this wouldn’t be unconditional. However, it is interesting to see how the shift in economic power is moving to China so dramatically, whereby it is in such a powerful position to bail out other Western countries who still view it with a hint of suspicion. Although, I’m not sure the move would be entirely welcomed within China itself, where many citizens are still living on wages below $2 per day. Maybe China may need to help its own people before stretching its financial arms.

All in all, I’m not sure whether I should be gleeful or be boasting about the fact I have more certainty and stability in my NatWest graduate current account than Greece has in its Central Bank, or even the fact that my pet cat has a better credit rating than the Italian Finance Minister. All I do know is that they had all better come to a mutual agreement so we can look forward to the future with optimism and don’t have to save our £5 pocket money from a young age.

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