Introduction
The Eurozone, officially referred to as the euro area is an economic and monetary union made up of 17 European member states. These states gave up their sovereign currency and adopted a common currency known as the euro when they joined together to form the Eurozone. The research paper seeks to point out the financial ramifications of the debt crisis facing the members of the Eurozone and the possible measure to take to prevent a country’s economy from collapsing as well as the value of the euro from falling. The paper also seeks to point out the effects of a the crisis on all countries not just the once affected by the crisis. A fall in the Euro will subsequently affect all the countries that use as their sole legal tender (Cooper 2011, 13).
The euro are is currently made up of the following member states; Ireland, Greece, Germany, Estonia, Netherlands, Spain, France, Malta, Italy, Austria, Cyprus, Luxemburg, Belgium, Slovakia, Finland, Slovenia and Portugal. Other European countries obliged to join and become a member of the euro area have to meet certain stipulated criteria for them to do so. Once the Eurozone was formed, there were no stated out provisions for states to leave the group or face any form of expulsion (Cooper 2011, 18).
In the year 2009, Greece, a member of the Eurozone faced serious financial that was followed by her inability to repay her debt. This sequence of events followed, Ireland, Portugal and Italy that faced a similar financial crisis with the countries nearing a financial meltdown with the euro being threatened with loss of trading value in the market.
Thesis statement
The financial crisis has affected member of the Eurozone and has led to the depreciation in value of the euro, hence, adversely affecting other European countries as well as the rest of the world.
Body
The Eurozone is noted to have been formally officiated with the 1989 Delor’s report publication and the introduction of a common currency in 2002 when the euro notes and coins were made and circulated into the economy. Having a common currency that bound the member states was one of the major objectives of the European Union that led to the member states being transformed into a European community. The member states formed the European Central bank that was in-charge of setting the monetary policies which governed the circulation of the euro in the market (Kouretas & Vlamis 2010, 394). The main aim of the ECB is to prevent inflation and control stock prices of the euro in the international market. There is no single fiscal policy, governance or common representation of the euro, though the euro group was formed and is in-charge of making political decisions that affect members of the Eurozone as well as the euro. The euro groups made up of all the finance ministers for the member states though in times of emergency, heads of states of the Eurozone take over the euro group. The Eurozone has established various provisions for granting loans to its member states to help them settle their national debts. Some fiscal integration has also been enacted by the Eurozone, such as the mandatory peer review of member state’s national budget, especially for countries receiving loans from the Eurozone (Kouretas & Vlamis 2010, 399).
Greece economy is ranked as the 37th largest in the world with an estimated nominal gross domestic product of $309 billion. Greece economy is regarded as the 15th largest among the member states in the Eurozone. Greece’s economy is regarded as high income and advanced with a per capita income of $27, 624 per person’s purchasing power. Being a developed nation, her economy is mainly composed of the service sector that takes a large percentage of the state’s annual revenue earnings. The service sector takes up 85% of the entire Greek economy, industry with 12% and agriculture takes up 3%. Greece joined the Economic and Monetary Union in the year 2000 after passing a number of stipulated criteria. The Euro group used criteria such as a country’s public debt and whether it has been up to date with its repayment policies. Other criteria include; budget deficit, long term interest rates of a country, inflation rates and exchange rates used by a state (Valiante 2011, 24).
The European sovereign debt crisis is a financial meltdown that has made it very difficult if not almost impossible for member states of the Eurozone to repay their financial debts to international creditors. The governments of the affected states have been overwhelmed with the poor annual revenue earnings that have made it impossible to repay her debts without causing the country to go bankrupt. From as early as 2009, investors started fearing the insurgence of a debt crisis. This was as a result of the increase in government debts all over the world followed by policies meant to downgrade government debts for many of the European countries. A lot of concern brewed up that forced the finance ministers of member states to recommend a rescue package in 2010 of € 750 billion (Valiante 2011, 45). This money was meant to control the rate of inflation by ensuring financial stability across Europe; this led to the creation of the European Financial Stability Facility (EFSF).
Between October 2011 and February 2012, leaders of the Eurozone member states held a series of meetings where they agreed to implement more radical measures meant to prevent the economy of more member states from collapsing. Among the measures agreed upon was that banks would accept to write- off 53.5% of the total Greek debt that was owed to all the private creditors. The later agreed to increase the EFSF to € 1 trillion and make it a requirement that all European banks to achieve a predetermined capitalization margin of 9% per annum. Initially, the Eurozone did not have a unified fiscal policy and so, the member state leaders agreed to form a common fiscal policy that involved all members of the Eurozone to introduce and implement a balanced budget amendment (Valiante 2011, 48).
The debt crisis formula
Equation for a successful European Debt solution = Jubilee+ Marshall plan + Euro – NATO
Europe will have no option but to implement sweeping reforms especially in the financial and banking sector all in the maiden spirit of jubilee. The bigger challenge whether to keep ties with NATO and the financial institutions of the European Union. There was a positive feedback in the banking and financial sector in Europe which was linked to the Marshall plan. It was meant to provide a recovery plan with a rescue package for all European countries. The United States were responsible for giving the credit as well as financial aid for the Marshall plan (Haidar 2012, 57).
Though only a handful of countries have fallen victim and adversely affected by the sovereign debt crisis, it has been viewed as a problem for the entire Eurozone member states. Despite the financial crisis, the European crisis has maintained its stability. Before the end of November 2011, the euro was trading at a higher margin than the region’s major market trading partner as compared to when the crisis began. The most affected by the financial crisis are; Greece, Portugal and Ireland. These three countries together form 6% of the gross domestic product among the Eurozone member states (Haidar 2012, 59).
Greece was one of the first countries to face a financial crisis among the member states. The European leaders were forced to reach at an agreement of how to bail out Greece from the debt crisis. They resolved to obtain funds from both the European nations and the International Monetary Fund to assist Greece with her financial woes. Her financial problems and almost eminent collapse of the economy was as a result of her unrestrained spending of annual revenues for a number of years, proving loans to the public as well as the international debtors at very low rates and failing to implement the various financial reforms laid out by Eurozone. The later detailed statics revealed that Greece had very high levels of debt not settled and huge deficits that grossly exceeded the limits that had been set by Eurozone. The national debt that Greece is owed is about €300 billion which is almost the size of the country’s economy (Jonung & Drea 2010, 33).
The country’s deficit in terms of how much the country is spending as compared to how much it makes is at alarming 12.7%. The aftermath of the financial crisis has seen Greece’s credit rating go down to the bottom among the other Eurozone member states. This means that no foreign investor will want to invest in the country for fear of the country’s incapability of repaying the loan. This has left the country to struggle with paying its bills to its creditors as the interest rates on the debts owed continue to rise sharply. The New Greek government led by George Papandreou, who is the current Prime minister has been forced to forgo most of the pre-election promises to focus on the tough economic measure that have to be implemented such as the unpopular cuts on the country’s spending habit (Jonung & Drea 2010, 47).
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The data shows the annual revenue earnings of the European Union countries, Eurozone and United States of America. Eurozone’s financial situation was impeccable until the debt crisis that left not only Greece in a financial lope hole but most of the other Eurozone member states (Croxson& Roxburgh et al 2012, 98).
Greece will certainly affect member states of the Eurozone for the fact that they all share a common currency. Since Greece is already in violation of Eurozone’s policies on deficit management and with the international marketing betting Greece to default on payment of her debts, the euro will certainly lose credibility. Other nations are more likely to be infected with the financial doubts on Greece, which will affect trade transactions with other European nations. Close scrutiny is done on Portugal, Ireland and Italy since they have also fallen victims to the financial crisis. Where Europe results to using rescue packages from international bodies such as International Monetary Fund, Europe’s reputation is likely to be tarnished entirely affecting the rest of the European countries. (Croxson & Roxburgh et al, 2012, 105)
Though Europe’s reputation has been seen in bad light by the world and transaction with member states of the Eurozone is likely to be affected, the euro currency may survive the financial crisis. This is because according to analysts, the euro was trading at a better state than it was at the beginning of the debt crisis; hence, there is reason to believe that the euro may not lose too much value entirely. This is because, despite the rescue package being adopted by the Euro group, there are other measures that are being adopted to help the affected nations recover from the crisis. Countries such as Greece and Italy have greatly slashed its spending and have implemented various austerity measure meant to ensure a reduction in deficit by almost €10 billion. Taxes have been raised on items such as fuel, alcohol and tobacco while every civil servant’s retirement age has been raised by two years. A number of non- essential projects have been stalled to focus on reducing government expenditure and tough new laws have been imposed on tax evasion. These measures will help reduce spending, generate enough revenue to reduce its debts and raise the currency value. With these policies being implemented, the euro is certainly going to survive and recover from the financial crisis (Margaronis 2011, 15).
Analysts believe that having a common currency may have contributed to the financial crisis in other countries. This is so since, where the international community becomes doubtful of the economy of the countries using the euro and then they will avoid trading using the euro. This may result to lose in value of the euro and consequently leading to other European countries facing a similar financial crisis. Loss of value of the euro has an adverse effect on all the nations using the currency to trade. This is because; drop in value of the euro will lead to imbalance of payments. This is where it becomes cheaper to export than to import. Foreign currency becomes expensive and trade transactions slow down to the losses experienced by traders. More goods will be exported than imported; hence, a reduction in trade activities for a country is likely to result in a financial crisis. Collapse of the euro will not only affect the European nations but it will affect the entire world especially on countries that trade most frequently with the European countries. This only shows that it is better to face the consequences of saving the euro than to risk a global financial meltdown (Lapavitsas & Kaltenbrunner, et al 2010, 330).
Comparison of Eurozone with other economies,
2006. [29] Population GDPa % world Exports Imports
Eurozone 317 million €8.4 trillion 14.6% 21.7% GDP 20.9% GDP
EU (27) 494 million €11.9 trillion 21.0% 14.3% GDP 15.0% GDP
United States 300 million €11.2 trillion 19.7% 10.8% GDP 16.6% GDP
Japan 128 million €3.5 trillion 6.3% 16.8% GDP 15.3% GDP
This is data shows the performance of the Eurozone before the financial crisis. There exports and imports were at a competitive edge with the European Union, United States and Japan. Member states of the Eurozone were trading at a higher margin. However, with the financial crisis, the exports per GDP reduced to about 8% while the imports reduced to 11%. This shows that the financial crisis did affect the entire members of the Eurozone. The crisis will take some time to solve and a number of banks will go out of business but the main aim is to keep the Euro afloat and maintain its trading value in the market (Lapavitsas & Kaltenbrunner, et al 2010, 330).
Conclusion
Members of the Eurozone such as Greece have had to institute tough financial measures in a bid to recover from the financial crisis and prevent the euro from losing value in the market. The crisis has shown the unity of the Eurozone as they provided rescue packages to prevent the financial loophole from crippling their entire economy. It was evident that member of the Eurozone depend upon each other for financial support since the financial crisis affected all the members directly and indirectly. A fall in the value of the euro was proof of the ramifications the crisis had on affected countries. It is why, it was necessary that the rescue package be set in place to prevent a collapse of the value of the euro that would not only affect euro but the entire world. This begs the question whether having a common currency is beneficial. The advantages certainly outweigh the disadvantages since a strong euro would mean a strong economy for the member of the Eurozone, hence, the need to assist each other financially to help the affected countries attain stability once again.
References
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