Euorzone Crisis

For all of 2012 the crisis in the Eurozone dominated the news in Europe. As always Greece got the bulk of the attention, the problem for Greece is that every budget it passes has to have massive cuts mandated by the Troika. If they don’t pass the cuts then Greece doesn’t get the bailout money and it defaults on its debt. But everytime a budget comes out there are protests on the streets as people are fed up with the austerity. It didn’t help that Greece was forced to elect a new government twice. You see, Greece’s economy is in a death spiral, Greece struggles to pay its debts so gets a bailout from the troika. In exchange for money the troika force Greece to pass tough austerity, this forces the Greek economy to shrink as there is less money. This causes businesses to lay off workers or close altogether, adding to the government’s unemployed lists and causing the economy to shrink. This means less taxes are collected by the Greek government and more spending on unemployment benefits causing Greece to be unable to pay its debts. This forces Greece to go to the Troika for money and... you get the picture. Some fear that this death spiral could cause Greece’s economy to shrink by 25% of its pre-crisis level.

Spain had a bad year too, it was forced to bailout one of its largest banks, Bankia. Thankfully the Spanish government itself did not need a bailout, but was pressured to accept one. After summit talks in June Spain’s Prime Minister, Mariano Rajoy, got a massive victory; Merkel softened her hardline approach and allowed the Eurozone to bailout banks directly (rather than bailing out countries who had bailed out banks). This also brought the Eurozone to a banking union.

There were many fears that Italy could require a bailout to stay afloat; there was a problem. Italy is one of the world’s largest economies and there wouldn’t be enough money to save it. Thankfully Mario Monti, the country’s technocratic Prime Minister, has been able to steer Italy through this crisis pretty well. Unfortunately for Italy, Silvio Berlusconi is not quite gone, he is going to run for election this year. This spooked the markets as Berlusconi is a synonym for incompentence.

In the past couple of months the Eurozone has been much quieter and many are beginning to say the worst is over. And although I am optimistic, I agree with Merkel when she says the crisis is ‘far from over’.