The crisis in the Eurozone continues. The seeds of the crisis were sown when the single currency was created. It was always going to be difficult to determine the rate at which countries would join the Euro. As the years have passed the stresses inherent in different countries with separate and often diverging economies have become ever more apparent. The setting of a single interest rate across the Eurozone has inevitably meant that for some countries the rate was too high and for others the rate was too low.
Of course all these stresses were supposed to be contained by the Growth and Stability Pact. However it was never strictly enforced and deficit budget became the norm. Countries with weaker economies were able to get away with this for a while whilstever the markets believed that the stronger Eurozone Countries would be prepared to bail out ( in other words take on responsibility for the debts of ) the weaker Eurozone Countries. To an extent this is what has repeatedly been happening as the various bailout mechanisms have been created. Ireland, Portugal, Greece, Spain have all been assisted. The problem is that the medicine doled out by Brussels has not cured the patient. The problem these countries had was too much debt. Making those debts bigger is not the answer. The markets know that. This week 100 billion euros was pledged to ‘bail out’ ailing Spanish banks a move that became essential as creditors pushed up the costs Spain had to pay to borrow more money. The move worked…. for about a day after which the costs pretty much returned to where they were.
The problem throughout the Eurozone (just as in the UK) is that countries have too much debt, economies that are finding it increasingly difficult to compete with the tiger economies of the Far East and the growing economies of Brazil, Russia and China.
There is no easy solution.
The Fiscal Union Treaty proposed by the Eurozone countries is in essence a beefed up version of the Growth and Stability Pact. A leap towards the Eurozone countries becoming a single Country with financial decisions being taken centrally and individual nations losing their independence. I suspect that whatever the outcome of the latest Greek General Election tomorrow Brussels will do all it can to prevent Greece leaving the Euro. The Greek economy appears to be in such desperately poor shape that whatever happens I fear the hardship currently being suffered by ordinary Greeks will continue for many years to come.