Wednesday, July 22, 2015

The Greek Debt Crisis the collapse of EU inherent?

Uncertainty in Europe is looming large, following increase in the likelihood of Greece exiting the Eurozone. ‘Grexit,’ a term often used among global financial pundits as the ultimate withdrawal of Greece from the Eurozone, is beginning to appear close to reality.

Greece’s Public debt since 2011 had increased to a size, twice more than the size of its own economy.

Recent developments in the Eurozone like the Greek citizens voting against its creditor countries’ bailout plans had confused many economists and financial experts, when the Greeks asked for the same bailout later.

One reason for an overwhelming rejection of the bailout could be the fact that it had proven expensive and hurtful to Greece in the past. Bailouts came with strict terms such as cutting down on salary, reducing pension and collecting more taxes, driving the economy on its knees.

These developments have threatened a collapse of the Eurozone, should Greece, ultimately withdraw from the European Union.

But the collapse of the Eurozone was inherent right since the formation of the European Union. After the establishment of the Union, countries shared a uniform monetary policy under the European Central Bank, but they had their own government with their own fiscal policy.

This led to a situation among countries where it became difficult to adjust their respective fiscal policies with a uniform monetary policy.

In the past, throughout history, European countries never went along well with each other. They were all traditional enemies and waged several wars among each other, ultimately resulting in the devastating Second World War.

Businesses among European countries took place scarcely, as they did not like each other; so they ventured out, seeking colonies in other continents. The end of colonialism after the war however forced European countries to look at each other as prospective business partners.

Realizing this and leaving behind their hostilities, countries opened up trade barriers and allowed businesses to expand beyond national borders. The last trade barrier came to a symbolic end with the fall of the Berlin wall that separated East and West Germany.

European nations were then brought under the umbrella of the European Central Bank and a single currency, the Euro.

The introduction of Euro brought about a transformation in Europe as credit became cheaper. With cheaper credit, European countries were relying more on credit than tax to implement development activities.

Some governments became too generous and provided more pension and collected less tax from its citizens. Financing development activities through credit meant borrowing more money to repay already borrowed money, which in financial parlance is described as deficit financing.

As long as there was enough credit, the practice of availing credit to repay credit went well until 2008 when a global financial system crashed following an overwhelming default in home loans in the United States.

As crisis rippled across the world, credit became dearer and more expensive. Countries like Greece did not get enough credit to repay their earlier loans, this situation threatened a default that would not only affect the Eurozone but also the rest of the world.

Agreeing to help, stronger economies like Germany offered to bail out Greece, but only if it agreed in return to implement austerity measures. This measures hurt the Greek economy. Government salary and pension are cut and credit, small and large, became expensive.

Many lose job and pension. Families survive without income and banks shut down. The economy shrinks by 25 percent and unemployment reach troublesome level. CNN reported on June that one in two young people are without work in Greece.

These problems today have assumed its name as the sovereign debt crisis.

The escalating problems and uncertainty is slowly molding Europe into a financial black hole that may collapse on itself and also drag the rest of the world with it.