EUROZONE
The eurozone, officially called the euro area, is aneconomic and monetary union(EMU) of seventeenEuropean Union(EU)member statesthat have adopted theeuro
(€) as their common
currency and solelegal tender.The eurozone currently consists of Austria, Belgium, Cyprus,
Estonia,Finland,France,Germany,Greece,Ireland,Italy,Luxembourg,Malta,theNetherlands,
Portugal,Slovakia,Slovenia,andSpain.Most other EU states are obliged to join once they meet
the criteria to do so. No state has left and there are no provisions to do so or to be expelled.Monetary policyof the zone is the responsibility of theEuropean Central Bank (ECB) which is
governed by a president and a board of the heads of national central banks. The principal task of the ECB is to keep inflation under control. Though there is no common representation,governance orfiscal policyfor thecurrency union,some co-operation does take place through
theEuro Group,which makes political decisions regarding the eurozone and the euro. The EuroGroup is composed of the finance ministers of eurozone states, however in emergencies, nationalleaders also form the Euro Group.Since thelate-2000s financial crisis,the eurozone has established and used provisions forgranting emergency loans to member states in return for the enactment of economic reforms. Theeurozone has also enacted some limited fiscal integration, for example in peer review of eachother's national budgets. The issue is highly political and in a state of flux as of 2011 in terms of what further provisions will be agreed for eurozone reform.On occasion the eurozone is taken to include non-EU members who use the euro as their officialcurrency. Some of these countries, likeSan Marino,have concluded formal agreements with theEU to use the currency and mint their own coins. Others, likeMontenegro,have adopted the eurounilaterally. However, these countries do not formally form part of the eurozone and do not haverepresentation in the ECB or the Euro Group.
HISTORY OF EUROZONE DEBT CRISIS
Anyone who hasn’t been living in a cave for the last 6 months is probably aware of the fiscaldisaster that has surfaced in Europe. It’s being billed as the Greek Debt Crisis by the media, but
intelligent analysts, investors, and traders, understand that it is far beyond Greece. It is theEuropean Debt Crisis. Let me give you a super basic history lesson on the Euro and how we gotto where we are today, which is the possible demise of the Euro and the break-up of theEuroZone.
When the EuroZone formed in the late 90’s, Germany and France were the economic powers and
every other country was clearly in a subservient position, economically speaking. Whencountries want to build roads, fund schools, and do various otherlarge-scale projects,they fundthis activity by issuing debt in the form of government bonds. Countries that are economicpowers are able to borrow this money for pretty cheap. However, countries that are not inexcellent financial shape have to pay more to finance their debt by offering investors a higheryield. Is it more expensive to borrow $100 for 1% interest or 2% interest. Of course, 1%.Economically-weak countries such as Greece, Portugal, Italy, Ireland, and Spain were payingquite a bit to be able to borrow money. By joining the EuroZone, they were magically allowed toborrow money at very close to German bond yields. This means that because Joe is friends withBob, even though Joe is financially irresponsible, he is able to borrowmoneycheaply and easilybecause he is friends with Bob. You get the picture.So the grand idea when the EuroZone started was that these weak countries like Greece would beable to borrow money at cheap rates in order to economically develop their countries in aresponsible manner. This would help them close the gap with stronger countries like Germanyand France, and then all of Europe would grow more powerful. But, oh how the idealistic plansof man often fail in reality.What went wrong you ask? Well, of course Greece, Portugal, Spain, Italy, and Ireland borrowed
money. It’s what they did with the money, and how much
they borrowed that became a problem.Instead of using the money to developstrong economic infrastructurein their respectivecountries, they went on reckless spending sprees. Imagine a college freshman with a new creditcard and a mall 2 minutes from campus. That may be a bit of a stretch, but you get what I mean.And so here we are 10 years later. These countries have spent so much money and developedsuch irresponsible fiscal agendas that they are now having trouble paying back all those loans.To make it worse, investors are now demanding more yield in order to hold the debt of thesecountries. That is making it even harder for the PIIGS (Portugal, Italy, Ireland, Greece, Spain) topay back the money they owe. Thus, in the current Age of Bailouts, the EuroZone has comethrough and promised to loan these countries the money they need.
CAUSES OF EUROZONE DEBT CRISIS
The European sovereign debt crisis has been created by a combination of complex factors suchas: the globalization of finance; easy credit conditions during the 2002-2008 period thatencouraged high-risk lending and borrowing practices; international trade imbalances;real-estatebubblesthat have since burst; slow growth economic conditions 2008 and after; fiscal policychoices related to government revenues and expenses; and approaches used by nations to bailouttroubled banking industries and private bondholders, assuming private debt burdens orsocializing losses.One narrative describing the causes of the crisis begins with the significant increase in savingsavailable for investment during the 2000-2007 period. During this time, the global pool of fixedincome securities increased from approximately $36 trillion in 2000 to $70 trillion by 2007. This"Giant Pool of Money" increased as savings from high-growth developing nations entered globalcapital markets. Investors searching for higher yields than those offered by U.S. Treasury bondssought alternatives globally.The temptation offered by this readily available savingsoverwhelmed the policy and regulatory control mechanisms in country after country as globalfixed income investors searched for yield, generating bubble after bubble across the globe. Whilethese bubbles have burst causing asset prices (e.g., housing and commercial property) to decline,
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