EUROZONE FINANCIAL CRISIS

Eurozone Financial Crisis



Eurozone Financial Crisis

Introduction

The eurozone (part of the Economic and Monetary Union (EMU)) is an area comprising the countries of the European Union that have adopted the euro (€) as currency. Seventeen EU countries representing nearly 322 million inhabitants are part of the eurozone. The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

If a bankruptcy is declared then according to the laws of US, all the investments are lost by the common stakeholders. The stockholders are forced to wait till bond holders get the shares of the bankrupt organization. The loosing parties include the employees of the company, the stockholders, bond holders and the preferred stockholders. Loads of the company is restructured, some employees are dismissed (Helleiner, 2009, Pp. 55).

The company becomes expectantly meaner and leaner than before. The bankrupt company is likely to make a stronger comeback, if the CEO and the workers are capable to handle the pressure, limiting the spending amount, increasing the quality of its product and the customer services.

PIG Countries

Consider the situation of PIGS countries: The collective GDP of the countries is about $3.6 trillion, about 1/4 that of the United States. Their combined total debts are $3.9 trillion or about 110% of its combined GDP.

The GPD and Debt of PIG Countries

Portugal

GDP   

$230

Debt  

$286

Italy

GDP       

$1.75

Debt      

$1.40

Iceland

GDP    

$12.50

Debt 

$5.30

Ireland

GDP    

$229

Debt  

$286

Greece

GDP    

$350

Debt   

$236

Spain

GDP    

1.47

Debt  

$1.10

Problems of Pig Countries

The problems of these countries are high federal discrepancy, high national debt and shortage of sufficient income to compensate for its loans and government programs. In other words, all these countries are on the brink of risking bankruptcy (DORNBUSCH, 1976, Pp. 1161-1176). The crisis can be avoided easily, if they can borrow enough money to get over this time. But the problem, unless they put their house in order, the other countries do not want to lend them any money. Other EU countries such as Germany and France do not like to lend money to Greece unless Greece reduces its annual deficit to a more manageable 3% limit of its GDP (currently at 13+% of its GDP.) These countries (and IMF if have to) have enough money to lend money to Greece then the crisis can be avoided.

Now, let's see what's going to happen if Greece is allowed to default on its loans. The losers are European and American banks and financial institutions who have lent money to Greece.

These companies will lose their investments in Greece but economies in other PIGS countries continue as usual. The damage can be contained. Stock market will suffer temporary setbacks then moves on. Citizens of Greece, of course, will suffer and they have to go on with fewer benefits and higher taxes so that Greece the country can pay the interests on its loans. I think Germany and France are using the emergency loan as a bargaining chip to force Greece into cutting its spending and bring its deficit to a lower level (FELDSTEIN, 1997, Pp. ...