The eurozone is under debt crisis. The crisis has affected the financial system of the entire EU. At the moment most eurozone states are suffering from public debt growth, fragile banking system and low pace of economic recovery.
The so-called PIIGS states (Portugal , Ireland, Italy, Greece and Spain ) are suffering most of all. PIIGS may well do the dirty on the entire eurozone. Will the common Euro currency withstand the pressure?
Why did PIIGS start causing problems?
Since the introduction of the common currency, the financial and economic situation in the PIIGS states has changed. According to ICM Brokers, a significant decline in interest rates made bank loans more affordable both for consumers and industrial sectors. However the results are not as positive as they could have been due to some peculiarities of those countries:
· The PIIGS markets turned more liquid and increased consumer demand, thus causing consumer price and salary hikes, especially in public sector. The business climate in those countries was improving and attracting more foreign investors. There was a lending boom. Following the example of the PIIGS governments, numerous banks, companies and common people started buying everything (vehicles, fixed property etc.) on credit, thus running into debt.
· There was no balanced economic development. The countries failed to boost their exports after entering the global market because most products stopped being competitive after the national currencies were devalued. Only few sectors saw improvement, including the sectors of domestic services and construction.
· Higher demand expanded imports but didn’t favor exports. There was no major GDP increase while the countries’ public debts kept getting more considerable.
· 2008 was “the day of reckoning”. The lending volumes reached critical levels. However, due to numerous external and internal economic shocks seen in 2008 the borrowers were no longer able to service their debts. Imports declined due to weak consumer demand. The level of unemployment started growing while numerous investors started leaving the EU countries. The EU’s construction and housing sector suffered most of all.
The global economic crisis revealed the weak spots of the PIIGS’s economies. It can be seen in the charts below:
GDP growth since the introduction of EUR:
Cumulative budget deficit/surplus (% of GDP):
Unemployment rate (with a glance at seasonal fluctuations):
The crisis triggered the “domino effect”. All the economic sectors of the PIIGS states were affected. The social and political sectors came under pressure as well.
The consequences of the crisis started threatening the existence of the common European monetary policy as PIIGS’s debt problems started affecting other EU states.
How can the EU save PIIGS and itself?
The EU authorities started being worried that the debt problems might spread over the entire EU. So they implemented a couple of major steps:
In May 2010 Greece became the first eurozone country to receive financial aid (a €110B loan) as it was considered the riskiest economy. However the financial aid failed to bring positive results as the debt kept growing further. In particular, the Greek debt has already exceeded 150% of the national GDP, which is the record for the EU.
During the summit held in July 2011 the EU leaders worked out further measures to overcome the Greek debt crisis. They promised to provide Greece with another loan (€109B) in exchange for austerity measures. However, the economic losses caused by lower supply and demand should be compensated by something. Otherwise, the unemployment rate will keep growing and the budget won’t see any inflow, thus making financial aid useless. Besides, the EU cannot lend to Greece forever as there some other eurozone states that need attention and help.
The only way out is to restructure all the Greek debts and some debts of other eurozone states. However such steps may seriously damage the financial system of the entire European Union (in this case there will be no economic growth in Europe).
The cumulative debt of the PIIGS states is equal to €3 trillion.
Public dets (EUR):
Public dents (% of GDP):
In absolute terms Italy and Greece are the main debtors. Even in global scale they yield only to the USA and Japan.
EUR prospects:
The situation is so difficult that even healthy EU economies have to cut their budgets, which doesn’t sound reassuring. European banks hold a lot of bonds issued by those countries that are on the verge of default. At the same time the EU’s major and peripheral states cannot solve the problem due to some economic and cultural disagreements.
1. ECB’s policy. Only a single financial policy can save the common currency. However, there is still no such policy. Consequently the ECB should keep lowering interest rates and buying the T-bonds issued by the debt-ridden countries.
2. Germany as a lifesaver. On Se 8th in Bundestag the German authorities will discuss some emergency steps to stabilize the situation in the EU. Angela Merkel will have to do her best to convince the opposition to help the “sick” neighbors.
3. Joint efforts to combat the crisis. The only way to save the eurozone and the common currency is by joint actions and cooperation between the EU’s powers. However actions should include numerous painful reforms. If the expenses are evenly distributed between all the EU members, it will probably help to avoid further social and political tensions and to preserve the integrity of the eurozone and the entire EU.
The eurozone’s instability cannot but affect the common currency. According to the Department of Masterforex-V trading system , since late August the Euro currency has been losing its value against the US Dollar. The downswing started on August 29th has already broken below the MF pivot (1.4258) and the sloping channel. The next significant level of support is around 1.4103. If EURUSD resumes its rally, it will encounter serious resistance around 1.4532 (another MF pivot).
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Will EUR survive the current economic and political instability?
