A Comprehensive Guide To Understanding The Eurozone Crisis And Avoiding A Repeat In The Future
Crisis in the Eurozone is a great book for understanding what caused the eurozone crisis in 2009.
It takes readers through each of the root causes and explains why they led to the crisis, focusing on why it was felt more severely in some member countries than others.
You’ll learn how GDP growth rates compared among eurozone states and why certain countries were hit harder than others.
It will also explain the possible structural reforms that could be taken to prevent such a crisis from happening again.
Additionally, the book looks at specifics of the crisis, such as why Germany wasn’t as impacted despite a higher unemployment rate and why austerity measures weren’t enough to solve Greece’s woes.
It also covers what would happen if Greece left the eurozone.
By reading this book, you will gain a comprehensive understanding of what caused this crisis so that you can better prepare for any such future occurrences.
The Impact Of The Eurozone Crisis: Why Germany Fared Better Than Greece And How Inflation Rates Played A Role
When the eurozone crisis swept across Europe in 2009, it wasn’t a one-size-fits-all situation.
Some countries, such as Germany in the core of the eurozone, fared better than other countries like Greece on its periphery.
The difference in economic impact cannot be explained by differences in GDP growth rates, which were similar across the eurozone.
Moreover, looking at unemployment rates doesn’t help either: both countries experienced levels around 8-11 percent.
The real explanation lies in inflation rates—the amount that prices increase over time.
In 2006, Greece had an inflation rate of 3.2 percent while Germany’s was 1.58 percent— barely half of that.
Consequently, Greek products became increasingly more expensive relative to German products and Greek companies became less competitive during the eurozone crisis.
This helps explain why some countries suffered more than others due to this economic event: higher inflation rates are what really contributed to an unequal impact for certain Eurozone countries affected by the crisis.
Germany’S Lower Nominal Unit Labor Cost Helped Create A Competitive Advantage During The Eurozone Crisis
The eurozone crisis was partially caused by differing labor costs between countries.
Germany, for example, had considerably lower labor costs than countries like Greece, Portugal, and Spain due to their Agenda 2010 reforms.
These reforms increased taxes for employees and decreased taxes for employers which created more room for employer investment.
This allowed German companies to have a lower nominal unit labor cost (NULC), meaning they could offer competitive pricing compared to companies from the periphery.
It’s no surprise that Germany has been more competitive than other countries in the eurozone given its lower NULC rates.
According to economists, in 1995 there was virtually no change in its hourly wage versus productivity ratio while others had a much steeper increase in this measure.
For instance, between 1995 and 2008 the NULC in Greece rose by over 60 percent;Spain and Portugal had 50 percent increases.
These figures make it clear why Germany was able to stay competitive despite having high wages: the Agenda 2010 reforms enabled economic freedom which made it possible for them to sell their products at better prices than those from peripheral states who relied on increasing wages rather than improving productivity.
The Balance Of Payments: An Overview Of Macroeconomic Theory And The Eurozone Crisis
The balance of payment is an important measure when it comes to understanding a nation’s economic situation.
It is defined as the difference between how much money flows into a country versus out of it.
This includes all the various forms of money transfers, such as foreign direct investment and portfolio investment.
To get a more nuanced view of the balance of payments, we can look into macroeconomic theory.
This states that a country has something called the current account and capital account, which makes up their balance of payments.
The current account includes the net income with exports minus imports (the trade balance), plus returns on investments and net cash flow (which come without obligation).
If this adds up to a positive number, there’s an overall current account surplus.
On the other hand, if this number is negative, then it’s a deficit which must be compensated by money transfers – meaning that more money needs to be sent out than received – in order to have an overall positive balance of payments.
The Pre-Crisis Macroeconomic Conditions Of Europe: Current Account Deficits And Investments From The Core
Before the eurozone crisis, countries from the periphery were running into a current account deficit that was financed by investments and loans from banks located in the core of the eurozone.
This deficit was caused by an increase in wages within these peripheral countries leading to a decrease in their competitiveness and an eventual decrease in exports.
Simultaneously, due to low NULCs and their ability to produce goods cheaply, many countries from the core of Europe experienced an increase in demand for their products.
This prompted companies and banks in the core to invest heavily into those countries and offer them loans, as it appeared potentially lucrative.
The situation became further complicated when Lehman Brothers collapsed during the 2008 financial crisis – this led to a great deal of uncertainty throughout financial markets across the world so, as a result, banks began investing more cautiously on international markets instead opting for safer options like lending money to banks in the aforementioned periphery countries with European governments’ reassurance that they would act if needs be.
The Greek Government’S High Debt Led To Its Own Problems During The Euro Crisis
When the Euro crisis hit, it was no surprise to find that Spain had more outstanding overall debt than both Greece and Portugal combined.
Both relative and absolute debts were bigger.
However shockingly, Greece had a much greater portion of public debt while Spain had more domestic debt.
Greece’s taxpayer funded public debt made up 53 percent of its total debt whereas Portugal and Spain only had 27 percent and 17 percent respectively.
Despite their comparative sizes, Greece still had a comparable amount of domestic as well as external debt.
The issue here really comes down to why Greece held so much public debt in comparison to other peripheral countries – like Portugal and Spain – with far lesser amounts.
This is where the book “Crisis In The Eurozone” will offer insight into the deeper causes behind this vast divergence in public debts between countries on the periphery.
The Stability And Growth Pact Put Greece In A Difficult Situation With No Easy Way Out
The eurozone countries needed to come up with rules in order to properly manage their collective currency and work together collaboratively.
This was done through the 1997 Stability and Growth Pact, which established guidelines for each country’s national debt levels.
For Greece, this became a particularly tricky situation as it had such high levels of public debt relative to its GDP that the government was unable to engage in any beneficial fiscal activities which might have helped with economic growth or infrastructure projects.
These restrictions meant that not only did the government need to limit its spending due to its large public debt, but also because Greek businesses were becoming increasingly uncompetitive, resulting in declining tax revenue for the government.
As a result, Greece found itself in financial bind, unable to increase its spending or borrowing without breaking the eurozone’s rules.
The Ineffectiveness Of Austerity Measures: A Case Study Of Greece
Greece resorted to austerity measures in an effort to solve its financial problems, but these efforts ended up being in vain.
Greece’s strategy was twofold, aiming to bring down wages and reduce public debt.
It did this by cutting public sector wages, increasing taxes, and reducing social service spending.
Furthermore, the country also privatized certain businesses and tried selling off pieces of its state railway operator too.
Unfortunately, the austerity measures fell short of actually solving Greece’s economic crisis as other countries in the eurozone also implemented similar strategies which effectively canceled out any potential national benefit of lower unit labour costs (NULCs).
Eventually it became clear that while these measures helped somewhat in stabilizing the economy temporarily, they were unable to completely solve Greece’s financial troubles.
Reconciling Structural Disparities In The Eurozone: Making A Pact That Balances Sovereignty And Monetary Health
The eurozone has been struggling with structural problems since the crisis began, and reforms are needed to help solve these issues.
But unfortunately, these reforms come with their own risks as well.
For example, increasing the European budget by around five percent could create a safety net for states like Greece that have high public debt – but this would mean less sovereignty for the member states.
Abolishing the Stability and Growth Pact would also allow those countries in trouble to engage in government spending to help revive their economies – but this could lead to devastating consequences if they accumulate too much debt and default on their payments.
These potential eurozone reforms could certainly improve things for countries in the periphery, but it comes with risk and there is no guarantee that it will work out for everyone involved.
The Pros And Cons Of Greece Leaving The Eurozone: Would It Help Or Harm The Economy?
What would happen if a country from the periphery of the eurozone decided to call it quits and leave the common currency bloc? This could have potentially dire consequences for both the country that left, as well as for the core members of the eurozone.
If a country did decide to break away from the euro, most likely they’d choose to reintroduce their national currency.
Let’s say for example, Greece deciding to bring back the drachma.
When this new currency is introduced with central bank exchange rate at 1:1 with euro, it could immediately reduce private and public debts held by creditors in other countries.
That’s because when it depreciates, every euro debt will halve in value once converted into new drachma.
This would make products produced in Greece more affordable domestically and abroad, thus improving its competitiveness.
But unfortunately, it would be accompanied by some major risks – notably losses suffered by banks in core countries due to government bonds turning worthless.
This could then lead to wider economic turmoil and further capital outflows from Europe as investors start to fear of another potential exit down the road.
The takeaway from Crisis in the Eurozone is that major structural issues led to the current crisis within the European Union, including an unequal balance of economic competitiveness between countries.
This means that reform must be pushed for in order for meaningful change to occur – however, each reform carries its own risks and implications.
Ultimately, it will be up to governments and citizens alike to implement these measures in order to attain a more stabilized state within the European bloc.