Euro-Zone Crisis





Euro-Zone Crisis

Euro-zone countries are currently in crisis following the failure of their multinational currency. The failure came because of technical mismanagement of trying to impose the Euro to diverse groups of countries. Countries that use the Euro currency are currently in trouble since they are under the huge burden of high spending by their governments. The big determining factor for interest rates is not determined by the level of debt their governments are involved in but also, whether the government is able to borrow in its own currency. For instance, Britain’s debt is much worse than Spain’s. It has increased by 17% compared to that of Spain. All this issues might have something to do with the banking systems (De Grauwe 4).

The banking system of Britain is worse than that of Spain. This is however, easened by the fact that Britain does not belong to a monetary union thus making it powerful in controlling the currency it uses to issue its debts. Members of the monetary union issue money in currency, which they have no control. The seventeen Euro countries are unable to get Euros without limits from the European Central Bank. The tough policy by the bank caused the fall of interest rates in countries like Spain and Italy where interest rates were high (De Grauwe 5).

Countries cannot borrow money in their own currencies since they have a long history of inflation and no buyers will avail themselves to make bonds denominated in their national currency. Take for instance Greece; the country has placed itself at the sympathy of European central Bank. It cannot print its own currency without limits and it is unable to borrow in the global market and therefore depends on the monetary fund issued by the bank to pay government workers. Italy on the other hand depends on the support of the bank to limit the rise of the interest rates for its government bonds (De Grauwe 6).

The Euro-Zone crisis has had the following consequences; countries like Greece, Portugal, Spain and Italy have faced years of slow growth in their economic systems. These countries have high debts and current account imbalances, which bars them from growing economically and from increasing profitable bonds in international markets. The Euro zone countries have been faced with unemployment crisis. The rise of unemployment especially youth unemployment is one of the main consequences of the Euro Zone crisis(De Grauwe 12).Quarters of the young people in those countries are jobless and face challenges while finding means to sustain oneself. To overcome this challenge, these countries have to undergo major revival growth processes.

Trade imbalance is another consequence of the crisis. It has affected the changes in relative labor costs, which has made the countries less competitive. The countries that allow their remuneration to grow more rapidly loose competitiveness (De Grauwe 18). Their productivity is likely to go down since the most skilled people opt to move to work in places with better economic balance. Countries with huge debts have no time to focus on trade but put more focus on the payment of that debt. Countries with debts above 78% of the Gross Domestic Product are susceptible to a rapid economic deterioration.

The crisis has brought about the rise of household and government debt levels. Countries like Greece and Italy failed to follow their own internal rules and disregarded the international set standards, which were formed to reduce debt levels and spending (De Grauwe 21). The adoption of the Euro currency by different countries led to low return rates for their government bonds. As a result, creditors of the country enjoyed higher interest rates, which stimulated government and private spending to an economic detonation (De Grauwe 21). The increased government debts levels came about because of large bailout packages provided by the financial sector during the financial crisis.

The crisis also fueled monetary policy inflexibility. To be a member of the Euro-Zone, a country had to establish a single monetary function, which required them to use only one currency. The policy prevented members from acting independently. In other words, they were unable to create Euros in order to pay their creditors who enjoyed high interest rates. The monetary policy prevented these countries from establishing trade partners since they shared the same currency. European monetary authorities cannot help these countries because the European Central Bank is only apprehended with system-wide aggregates. It is therefore not the responsibility of the bank to maintain national economic conditions. The banks main objective is to maintain price stability of the currency in the Euro-Zone (De Grauwe 22).

The Euro-Zone countries faces a domestic banking crisis- a challenge which makes the balancing their domestic equilibrium hard. Their domestic banks are frequently faced by funding challenges. Domestic liquidity therefore reduces making it difficult for the banks to overturn their deposits and pay the interest rates. An example is the Greece and Portugal banking systems. They have been blown by the sovereign debts and even though the banks may make higher returns, the countries use them to pay those debts. In addition, members of the monetary fund union find it hard to use regular budget stabilizers. This leads to higher government budget shortfall. Investors shift since there is no hope of the governments paying their future debts.

 The Euro-Zone crisis is bound to continue if the solutions to these challenges are not met. The main challenge of these zones is to change their economic behavior. They should set new policies, which must avoid current account insufficiency through the limitation of national imports volume to amounts that can be funded with direct foreign investments and export earnings.

Work Cited:

De Grauwe  Paul. “The Governance of a Fragile Eurozone”.Ceps Working DocumentMay 2011:1-25. Print.

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