Eurozone Debt Crisis In Simple Terms

Most of us have come across the term Eurozone debt. crisis in the news recently. Despite several efforts by Angela Merkel, German Chancellor, several meetings among the heads of Eurozone countries and considerable pressure from other countries, leading European economic powers have failed to reach an agreement on a specific bailout plan that would stave off a default by one or more eurozone countries.

For those readers who have not got a clue on what all the fuss is about,we are here trying to explain it in simple terms.

What is Eurozone?

Eurozone is the economic and monetary union of  member countries of Europe who have adopted Euro as their common currency. Till date it consists of 17 members. Other members can join it and some of them are in the process and will in fact join once they fulfill the conditions.

Ten countries (Bulgaria, the Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania, Sweden, and the United Kingdom) are EU members not of Eurozone i.e they don’t use Euro as their currency. Before joining the eurozone, a state must spend two years in the European Exchange Rate Mechanism (ERM II). As of 2011, the National Central Banks (NCBs) of Latvia, Lithuania, and Denmark have participated in ERM II; most remaining currencies are expected to follow soon.

The euro is also used in countries outside the EU. Three states—Monaco, San Marino, and Vatican City have signed formal agreements with the EU to use the euro and mint their own coins but they are not considered part of the eurozone by the ECB(European Central Bank) and do not have a seat in the ECB or Euro Group.

The monetary policy of all countries in the eurozone is managed by the European Central Bank (ECB) and the Eurosystem which comprises the ECB and the central banks of the EU states who have joined the euro zone. Countries outside the eurozone are not represented in these institutions. Whereas all EU member states are part of the European System of Central Banks (ESCB). Non EU member states have no say in all three institutions, even those with monetary agreements such as Monaco. The ECB is entitled to authorise the design and printing of euro banknotes and the volume of euro coins minted, and its president is currently Jean-Claude Trichet.

The eurozone is represented politically by its finance ministers, known collectively as the Euro Group, and is presided over by a president, currently Jean-Claude Juncker.

What is Eurozone Debt. Crisis ?

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.

When countries want to build roads, fund schools, and do various other large scale projects, they fund this activity by issuing debt in the form of government bonds. Countries that are economic powers are able to borrow this money for pretty cheap. However, countries that are not in excellent financial shape have to pay more to finance their debt by offering investors a higher yield. Is it more expensive to borrow Rs. 20000 for 1% interest or 2% interest. Of course, 2%.

Economically-weak countries such as Greece, Portugal, Italy, Ireland, and Spain were paying quite a bit to be able to borrow money. By joining the EuroZone, they were magically allowed to borrow money at very close to German bond yields. This means that because Neeraj is in friendship with Gaurav, even though Neeraj is financially irresponsible, he is able to borrow money cheaply and easily because he is friend of Gaurav. You get the picture.

So the grand idea when the EuroZone started was that these weak countries like Greece would be able to borrow money at cheap rates in order to economically develop their countries in a responsible manner. This would help them close the gap with stronger countries like Germany and France, and then all of Europe would grow more powerful. But, oh how the idealistic plans of 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 develop strong economic infrastructure in their respective countries, they went on reckless spending sprees. Imagine a college fresher with a new credit card and a mall 2 minutes from campus. Fresher rather than using it for his growth goes on reckless spending spree in the mall.

And so here we are 10 years later. These countries have spent so much money and developed such 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 these countries. That is making it even harder for the PIIGS (Portugal, Italy, Ireland, Greece, Spain) to pay back the money they owe.

Why is George Panpandreou and Greece in news?

Greece is considered to be the major defaulter but other countries are also expected to be defaulter. George Panpandreou is the Prime Minister of Greece.

Why is Angela Merkel in news? What is her role?

Angela Merkel is the chancellor of Germany, the strongest economical power in Eurozone countries. She can help bailing out the defaulter countries by lending them money.Being the head of the strongest power in Eurozone, she also has a greater say in the affairs.

Has a solution been reached? what is the current status?

There have been hectic efforts over last few weeks involving a meeting between Greece Prime Minister George Panpandreou, German Chancellor Angela Merkel and French president Nicolas Sarkozy and another meeting between US Treasury Secretary Timothy Geithner (Crisis also believed to have an impact on USA) and European Union finance ministers.

Still no credible action plan has evolved to tackle the euro debt crisis. Despite considerable pressure from other countries, leading European economic powers have so far failed to reach an agreement on a specific bailout plan that would stave off a default by one or more eurozone countries.