The Eurozone Debt Crisis: How it started and how to fix it

[Babbler]

Okay, so I'm not an economist, but I been following the whole Eurozone Debt Crisis for a while now. The CFC Off-Topic threads on the subject seem unusually well-informed and well-behaved, so I guess I'll ask this: what caused this mess and how can it be fixed?

From what I've read, here is a ridiculously tl;dr summery: the single biggest problem with the Eurozone is that is a monetary union without a fiscal union, so that the imbalances induces by the former cannot be patched up with the latter. The decision making process of the European Union is such that it is hard to come up with quick and co-ordinated action to resolve this. In the end, it comes up with short-term, kick the can down the road solutions that just don't solve anything in the end.

The long term solution is either create a fiscal union to go along with the monetary union or break up the whole thing. Both of these choices are problematic. Proposals on how a fiscal union should work are vague, and it seems unlike that it can be implemented with another treaty. Breaking the Eurozone into two or more piece also seems troublesome, as it entail a lot of costs and could decrease trade between Eurozone members.

Obviously this is ridiculously short version, but is it correct in the outline? Again, what caused this mess and how can it be fixed?

 

[Rashiminos]

Prosecute financial fraud.

 

[pi-r8]

It turns out that having a large number of countries with totally different cultures, politics, economies, and languages, and forcing them all to use the same currency, causes some serious problems.

Specifically, it would benefit Greece a lot to have higher inflation right now, but they can't, because Germany doesn't need it and won't allow it.

I don't know what could fix it except either a large transfer for wealth from Germany to Greece, or a breakup of the Eurozone.

 

[Tahuti]

It turns out that having a large number of countries with totally different cultures, politics, economies, and languages, and forcing them all to use the same currency, causes some serious problems.

Culture and languages easily can be bowed if economic interest demands it. However, economy can easily be bowed when politics demands it and that is what is happening in Europe right now.

The problem is that the Greeks (and other Southern European countries) should be reforming their bloated and corrupt welfare states , yet they yield to the unrealistic demands of the "common people" and vested interests (namely, corrupt bureaucrats).
It is not an economic crisis: The Greeks don't lack money to cut spending.
It is a political one: Politicians simply don't dare to make unpopular but necessary decisions.

Those bailouts by Northern European countries are simply made to buy time for PIGS countries to reform their economic systems. But I seriously doubt it'll work.

 

[Winner]

Eurozone is here to stay, no matter what some alarmist economists say. Even if Greece leaves it, which is NOT going to happen, the rest will just go on.

EU will eventually overcome this "crisis" the way it always does - in the end, it will end up being stronger institutionally. I foresee some sort of European Commission oversight over member state's budgets, a European monetary fund to help members in trouble, and a strong pressure on the southern flank (Portugal, Spain, Italy, and maybe also France and Belgium, or what's left of it) to do something about their economies. The German bloc plus protectorates (the Netherlands, Nordic countries, Austria, Czechia, Poland, the Baltics) will become more dominant, whereas the French bloc will lose some influence and confidence. The British will stay on the sidelines as usual and support both sides hoping the EU falls apart, which to their dismay won't happen.

 

[Tahuti]

Either the EU gains more power or the Euro will vanish: The status quo cannot be maintained for much longer. I hope for the former, but the latter is possible as well.

The weakness of the Euro is basically, that it hasn't a common treasury, which is what practically every other currency has and is a safeguard against what is currently happening in Greece.

 

[kronic]

Eurozone is here to stay, no matter what some alarmist economists say. Even if Greece leaves it, which is NOT going to happen, the rest will just go on.

EU will eventually overcome this "crisis" the way it always does - in the end, it will end up being stronger institutionally. I foresee some sort of European Commission oversight over member state's budgets, a European monetary fund to help members in trouble, and a strong pressure on the southern flank (Portugal, Spain, Italy, and maybe also France and Belgium, or what's left of it) to do something about their economies. The German bloc plus protectorates (the Netherlands, Nordic countries, Austria, Czechia, Poland, the Baltics) will become more dominant, whereas the French bloc will lose some influence and confidence. The British will stay on the sidelines as usual and support both sides hoping the EU falls apart, which to their dismay won't happen.

Only if the EU can convince the Germans, Dutch, Finns and Austrians to pay large and permanent transfers. And only if the countries in crisis agree to surrender their national control over just about every aspect of financial, economic and welfare policy to Brussels. These are two very big ifs, and at this point, I'd say both sides would be stupid to agree to these measures. But if they don't, the whole thing will fall apart.

 

[dutchfire]

I hope and think the EU will survive this crisis.

Long-term, a lot of the new, eastern European member states are showing decent progress and hopefully, over time they will reach the economic level of the core nations. I think many eastern European member states were allowed in too soon, but I can understand the feelings and reasoning behind their entry.

The southern states are something different. They don't seem to be willing to work harder and longer to get out of the mess they are in. I think in the current day and age, a retirement age of at least 65 and 67 for most jobs should be fine. The difference between that and the retirement ages in e.g. Greece is enough to make a large difference economically.

 

[pi-r8]

Culture and languages easily can be bowed if economic interest demands it. However, economy can easily be bowed when politics demands it and that is what is happening in Europe right now.

It's not that easy. Culture and language differences make it much harder for workers to move around for different jobs, which is really important for a currency zone. That's why the millions of unemployed workers in Spain can't just move to Germany to get a job.

 

[Winner]

I hope and think the EU will survive this crisis.

Long-term, a lot of the new, eastern European member states are showing decent progress and hopefully, over time they will reach the economic level of the core nations. I think many eastern European member states were allowed in too soon, but I can understand the feelings and reasoning behind their entry.

Central European!

There are differences among them too. Hungary for instance is closer to Greece than to Estonia, not just geographically, but also economically. The Baltic states underwent internal devaluation (a trendy euphemism for massive reduction of welfare, public sector wages, and public spending in general) that would be unthinkable here in the Czech Rep., where politicians like to talk about austerity, but when push comes to shove, they don't want to be the ones cutting salaries, raising retirement age, reducing welfare, etc. I am almost glad this crisis occurred, because the tangible threat of ending up like Greece or Portugal has forced them to take debt seriously.

The southern states are something different. They don't seem to be willing to work harder and longer to get out of the mess they are in. I think in the current day and age, a retirement age of at least 65 and 67 for most jobs should be fine. The difference between that and the retirement ages in e.g. Greece is enough to make a large difference economically.

The South simply needs to reform more along the northern lines, that's the only way out of this mess for them. They won't like it, but it's necessary. Germany and other Northern countries will need to fund this transition if they want to keep the Eurozone.

I am an optimist - in the end, common sense will prevail. If the Eurozone failed, we could kiss the whole European project goodbye.

 

[Tahuti]

It's not that easy. Culture and language differences make it much harder for workers to move around for different jobs, which is really important for a currency zone. That's why the millions of unemployed workers in Spain can't just move to Germany to get a job.

That has nothing to do culture; if it is profitable enough, both workers and employers are generally more than willing to learn another language and adjust their culture if it suits their economic needs. More and more EU citizens are able to converse in English anyway.

First, Spanish workers receive unemployment benefits (depriving them of any reason to go beyond Spain for work) and second, due to free trade between EU countries, it is just as easy for employers to go to the unemployed than vice versa, if not more. And finally, there is no such thing as common European social security that gives unemployment benefits and pensions like the USA does.

 

[innonimatu]

I hope and think the EU will survive this crisis.

Long-term, a lot of the new, eastern European member states are showing decent progress and hopefully, over time they will reach the economic level of the core nations. I think many eastern European member states were allowed in too soon, but I can understand the feelings and reasoning behind their entry.

The southern states are something different. They don't seem to be willing to work harder and longer to get out of the mess they are in. I think in the current day and age, a retirement age of at least 65 and 67 for most jobs should be fine. The difference between that and the retirement ages in e.g. Greece is enough to make a large difference economically.

I hope it crashes and burns. And the dutch can go to hell with their oft-repeated pseudo-moralist speech about "unwillingness to work on southern countries". Try checking some actual statistics before stating foolishness.

 

[Maniacal]

Possibly not loaning money to a country so that it can pay off its previous debts to you would be a good start. I mean, why create even more debts for a country instead of just canceling the previous ones that it isn't capable of paying off anyway.

 

[Masada]

I hope it crashes and burns. And the dutch can go to hell with their oft-repeated pseudo-moralist speech about "unwillingness to work on southern countries". Try checking some actual statistics before stating foolishness.

I strongly support anything that tears the Dutch a new one.

 

[Winner]

I hope it crashes and burns. And the dutch can go to hell with their oft-repeated pseudo-moralist speech about "unwillingness to work on southern countries". Try checking some actual statistics before stating foolishness.

It's not that the southerners don't work hard, they're just rather bad at organizing their economy.

 

[kronic]

The game is up now. Yesterday USAA+. Today, Spiegel reports that the German government believes Italy to be too big to save for Germany. Oopsie.

Was about time they'd say the obvious.

 

[SerriaFox]

That has nothing to do culture; if it is profitable enough, both workers and employers are generally more than willing to learn another language and adjust their culture if it suits their economic needs. More and more EU citizens are able to converse in English anyway.

First, Spanish workers receive unemployment benefits (depriving them of any reason to go beyond Spain for work) and second, due to free trade between EU countries, it is just as easy for employers to go to the unemployed than vice versa, if not more. And finally, there is no such thing as common European social security that gives unemployment benefits and pensions like the USA does.

No it is not, it is my understanding that the labor laws of Spain strongly discourage moving production there. Although I don't know the labor laws of Germany, but it could be cheaper to pay a German more in order to avoid Spanish Laws.

 

[emzie]

The game is up now. Yesterday USAA+. Today, Spiegel reports that the German government believes Italy to be too big to save for Germany. Oopsie.

Was about time they'd say the obvious.

Italy's going to be stuck playing the villain.

 

[Bestbank Tiger]

There's a debt crisis in Europe? Didn't realize you had teabaggers there too.

 

[Tahuti]

No it is not, it is my understanding that the labor laws of Spain strongly discourage moving production there. Although I don't know the labor laws of Germany, but it could be cheaper to pay a German more in order to avoid Spanish Laws.

It is true that Spanish labor is very cumbersome, and it are the Spanish labor laws that has caused a great deal of the unemployment there in the first place. However, Spain has a slightly less developed economy than Germany has, so the lower wages may pay off despite the labor laws and the relatively large non-salary costs.