Since late 2009,
the eurozone has been in a state of economic crisis.
Let's take an introductory look at what this crisis looks like.
It turns out the crisis actually has 3 distinct,
yet interrelated sides.
The first side of the eurozone crisis
is a banking crisis.
There are for instance insolvent banks
in Ireland and in Spain.
Among other parts of the eurozone.
These banks lent out too much money,
often against real estate.
There were real estate bubbles in some of these countries,
including Ireland and Spain.
The value of the real estate fell.
Homeowners could not always pay back their loans,
and, often, the banks ended up insolvent.
They either have been insolvent or they remain insolvent to this day.
When it comes to Ireland and Spain in particular,
you can think of the crash of the real estate bubble,
and the resulting insolvency of the banks
as leading the way and driving those countries
toward a deeper economic crisis.
There is also a banking crisis in Greece,
but that's a somewhat different story than Ireland and Spain.
In the case of Greece,
there was first a fiscal crisis
resulting from the government spending too much money
and borrowing too much money.
The economy of Greece then collapsed.
It was then the case that, as a result, Greek banks became insolvent.
But that's a very different casual ordering of the story
than what we have seen in Ireland and in Spain.
Until the collapse,
a lot of Greek banking practices
actually have been fairly conservative.
A very important point here
is that when a nation has insolvent banks,
belonging to the eurozone makes that problem much worst.
And you can think of this in terms of a bank run.
Imagine, for instance, that you are a depositor
and you're holding Euros in a Greek bank or a Spanish bank.
And you wonder if that bank is sound and furthermore,
you wonder if the government is sound enough
to bail out the bank.
You're faced with a choice.
Should you leave your Euros in the Greek Bank?
Or should you move say, to a German bank?
Obviously, the German bank is safer.
So, there is over time what is called a silent run on Greek banks,
that is, there is capital flight.
People pull their money out of Greek banks,
send it to German banks or elsewhere.
This, of course, makes the Greek economy worst.
And when you have common currency zone,
it becomes much easier to hold that currency
without using a domestic banking system.
And so this problem of insolvent banks and bank runs has become much worst
in the eurozone,
than in other financial crisis around the world.
A second aspect of the eurozone problems
is capital and trade imbalances.
To put the point simply, Germany is exporting
a great deal more than it is importing.
So, capital flows into Germany.
A country like Spain or Greece is in the opposite position.
They are importing more than they are exporting.
So capital is flowing out of the country,
and, furthermore, to finance those imports,
Greece, Spain and some of the other periphery countries,
they need to borrow a fair amount of money.
Over time, if the periphery countries
are importing more than they are exporting.
Their debts will rise.
Ideally, you would like those countries to become more productive at exporting.
But that's not always easy, and thus you have
these capital and trade imbalances.
There has also been a problem of volatility
associated with capital flows.
In the previous decade,
a lot of money flowed into the periphery.
Borrowing rates were quite low, even for countries such as Greece.
And the capital inflow brought rise in rising standards of living
and in general, good times.
However, in the last few years
it's been understood,
that a lot of countries in the periphery are actually quite risky.
Money has flowed back out of the periphery,
and to northern Europe.
And there's been a kind of whiplash effect
where the capital inflow
was followed by a capital outflow.
And now those economies in the periphery
are somewhat starved for investment,
and they're borrowing at high rates rather than low rates.
Keep in mind that these problems also
are made worst by belonging
to a common currency area.
For instance, imagine that Germany and Spain
were not both part of the eurozone but they had some kind
of flexible exchange rate.
If the demand for German products were then systematically higher
than the demand for Spanish products,
well, the German currency would go up in value,
the Spanish currency would go down in value.
That would give us a pretty rapid way of getting back to equilibrium.
But when you're part of a common currency zone,
that's not so easy to accomplish.
We talk about this issue in more detail in our video unit
on optimum currency areas.
The third aspect of the eurozone economic crisis,
is a fiscal crisis,
namely, that some governments in the eurozone,
have run up bills which they now need to pay off.
Quite simply,
they have spent more money than they have been taking in,
in terms of tax revenue.
Then they have dysfunctional tax collection systems,
such as in Greece and Italy, or simply some irresponsible
pattern of spending behavior at the level of their governments.
Again, this problem takes somewhat different forms
in different nations.
In the case of Greece,
the bad spending behavior was the upfront problem
which led to an economic crisis.
In Spain it was different.
Before the euro crisis came,
Spain actually had something close to a balanced budget.
It's fiscal affairs were considered to be in order.
The probables that the Spanish economy collapsed so much
and revenue collection collapsed so much,
that Spain then ended up with a fiscal problem,
as a result of over-indebtedness
and the collapse of its real estate bubble,
and then some banking problems.
Keep in mind that these fiscals problems
tend to be embedded in a long-term growth crisis
for some of the eurozone nations.
For instance, if we look at the Italian economy,
that has been stagnant for sometime.
For instance, 12 years ago,
Italy had higher per capita GDP
than it has today.
There just hasn't been that much growth there in some time.
If we look at the Spanish economy.
Over the previous decade, there was rapid growth.
But it seems in retrospect, a lot of that growth
was driven by the real estate bubble.
Spanish productivity in a lot of sectors
actually has been pretty flat for almost 20 years.
That's a sign of an underlying structural economic problem in Spain.
The Greek economy is considered very much overregulated
and excessively correct.
If you look at the world banks doing bussiness index.
Well in 2012,
Greece ranks at only number 100.
That's simply not a very good performance.
In sum, it's worth stressing that all of these problems
interact and make each other worst.
But if you hear about why eurozone problem,
that's missing the point.
It's several distinct and interrelated problems
which require a number of different solutions.