What is the Euro Crisis?

The Euro Crisis: What is it, how did we get there and what's the solution? This article reveals my opinions on the Euro Crisis. Feel free to comment below and argue with by view point.

What is the Euro Crisis?

The Euro crisis refers to the problem amongst the Euro zone countries and their extremely high levels of Government Debt. High debt in itself is not the problem. The problem is the doubt cast on these governments to service such high debt to GDP ratios. This has resulted in a down grading of Government debt in many of these Euro zone countries. This makes it even harder for countries within the Euro to borrow to help balance their budgets and to service the current levels of debt. This in turn may lead to many of the Euro zone countries defaulting on their debts. The main countries to worry about are Portugal, Ireland, Italy, Greece, and Spain, affectionately and collectively termed the PIIGS.

Picture from freedigitalphotos.net

How did we reach this Euro Crisis?

The Euro Crisis came about as a result of may factors. I have identified two key problem areas. The first is that being in the Euro means that the PIIGS have little or no control over it's own interest rate. Interest rates for the Euro zone are set in Brussels and assume a one-size-fits all policy. The lack of control over a countries own monetary policy meant that it had one less tool with which to control the economy. Some countries will want high interest rates to slow their economy down as inflation creeps in and others want low interest rates to speed their economy up as they risk recession. Without that level of control, countries have to rely more and more on their tax and spending to control the economy. The problem with that is that if a country runs a deficit (spends more than it earns) and the economy is facing slow growth, in order to speed up the economy, it takes on debt to finance that deficit. This means that debt payments increase. Now that is generally not a problem when the economy is growing but when in 2007 recession struck, deficits increased and countries needed to borrow more and more money in order to restart the economy. This then developed into the Euro Crisis as regulators start to question a countries ability to ever pay back it's debts.

The second major problem is of course the incessant spending of countries. Even today at the height of this Euro Crisis, many countries are still running budget deficits including the UK (a deficit of about £126bn for 2011-12 --> REMEMBER: that's just the deficit, don't get me started on the size of the debt). It just seems to be logical to me that an obviously bad way to get out of debt is not to keep adding to it!

What's the solution to the Euro Crisis?

The solution to the Euro Crisis is obvious, although not easy. We need to address the two problems I outlined above.

To solve the first problem the Euro zone needs to go one of two ways. The poor solution is greater integration of the Euro countries with aligned politics and a fiscal union. However, it is my belief that countries will always differ for fundamental reasons such as culture and language and so many of the problems we face today shall remain. Instead, a better solution is for the Euro to break up and return to being a trading union. Yes, there will be a lot of pain along the way as countries will have to readjust to new currencies and businesses to the new climate but in the end we will be out of this mess. At least we will get away from this current stalemate of tinkering here and there whilst debts continue to increase.

The second is that countries need real austerity. 'But we're in austerity now!' some of you will claim. My response to this is that the problem is simple. We are spending too much. People can complain all they want when the government tinkers with this tax and that benefit but at the end of the day we are spending way too much! Spending needs to be slashed in all areas and borrowing cut to zero. I wouldn't touch taxation unless the government planned to reduce taxation. This is because taxation affects people's incentives to work. Any more tax may increase unemployment above its high levels.

Yes it's all very radical. I know this. However, desperate times call for desperate measures and in my opinion Governments in Europe have got it wrong for now. They have clearly tried and failed to sort the crisis over the last 5 years. It is time for a radical change.

Readers, what do you think the solution to the Euro Crisis is? So you agree with my view?

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