The Euro debt crisis finally came to a head when Greece defaulted on its first loan payment.
After months of European leaders scrambling to control this threat, critics have been
wondering if the Euro is more trouble than it's worth.
So, we wanted to know, was the Eurozone a bad idea?
The Eurozone was established in 1999.
Today it consists of 19 member states who have all adopted a singular currency: The
Euro.
Monetary policy concerning the Euro is decided by the European Central Bank located in Frankfurt,
Germany.
Their biggest role is preventing inflation by attempting to keep prices stable amongst
member countries.
Now, it would seem that it’s a good idea to combine powerful economies to feed off
and strengthen each other...
However, what happens when a weak country enters the mix?
Or when a strong country becomes weak?
There are strict guidelines for being considered a strong enough economy to join.
These are primarily based on a country’s long term stability forecast.
But Greece was able to enter the Eurozone without all the necessary qualifications by
severely understating their massive deficit.
On top of that, the 2007 financial crisis sent a lot of formerly powerful economies
into a downwards spiral, forcing the ECB to bail them out, lest the Eurozone fails too.
The ability of failing economies to bring down strong economies is one of the biggest
criticisms of the Eurozone.
Often, when a country has trouble paying its debts, it simply prints more money.
While this devalues the currency to some degree, it’s preferable to outright defaulting.
However, individual countries don’t own the Euro, so they can’t devalue everyone
else’s money to solve their own problems.
Instead, the ECB provides emergency loans, but in exchange for economic reforms to make
sure the country can keep up with everyone else.
You may have heard of these reforms as “austerity measures”.
Austerity measures mostly include massive government spending cuts, curtailing social
programs, and raising taxes.
Now, while this works in theory, it can also lead to severe consequences.
In Greece’s case, the EU’s austerity measures put a massive strain on the economy, and removed
the government’s ability to invest in the public sector.
This meant higher rates of unemployment, which led to fewer people paying taxes, leaving
less money for the government to pay back their ballooning loans.
Today Greece’s total inability to survive within the Eurozone has unprecedented consequences
for both the country and the European Union.
There are a number of subtle and complicated reasons for the Euro’s current instability.
However, the biggest problem simply comes from the inherent differences in attempting
to lump together economies with different growth, exports, relationships, and most importantly,
monetary politics.
So, all things considered, was the Eurozone a bad idea?
While the Eurozone may be beneficial to many countries, its ability to weather an economic
downturn may just be its ultimate failure.
Sometimes it’s hard to imagine what life is really like for people living in these
sorts of crises.
To get a glimpse of the struggles, check out this video on Seeker Daily.
Thanks for joining us on TestTube News, we’ll see you next time!