The poisonous root of Euro crisis

I still remember the day Euro coins and banknotes entered circulation on, it was 1st January 2002. Famous international News channels such as CNN, BBC to even Bangladesh’s local news channels BTV, ETV were telecasting this historic day live. All this started in Maastricht, Netherlands itself, as it is the fruit of Maastricht Treaty itself. Today, it’s 18th January, 2013. It’s been 11 years since that Historic day and here I am in the Netherlands, writing about “The poisonous root of Euro crisis”. Sounds like a script from a Hollywood movie, but frankly, I never thought this currency would go through such disastrous phase and I will be actually writing a blog about it.

Obviously the first thing that clicked my mind even before starting to research about it was “Why did it all go wrong? There has to be a rotten apple in the basket or poison in the root of the European Union tree to actually go through this Euro crisis. In order understand the overall situation; I will go through step by step with the help of my Euro Crisis Mind Map, and rationalize most probable global financial crisis scenario.

Why did it all go wrong?

It has to be the bad luck of the European Union, because the Euro crisis took place when European identity had begun to emerge and take their place. But, it actually started with the U.S. financial crisis of 2008-2009, when the global economy started to experience slow growth and this had lead to exposure of the unsustainable fiscal policies of European countries and around the globe. It’s the basic structural loophole that exists in the Euro zone system.

  • Firstly, the Euro zone system has monetary union without a fiscal union, i.e. Since the birth of the Euro zone, there was contradiction as it had inherited contradiction of having a monetary union but not a fiscal union. Each country had to follow a common fiscal path, but there is the existence of a common treasury to enforce, i.e. Authority to spend was driven by political force. As a result the European central bank had no control over monetary deficit.
  • Secondly, Euro zone countries differ in terms of productivity & structure. Most of the Euro zone countries have a lower productivity level in comparison to Germany. Even when it comes to unemployment rate there exists vast difference. Also Global Competitiveness index for the Euro zone countries differs in terms of ranking and secure.
Unemployment Rate in EU (Decemeber, 2012)

Unemployment Rate in EU (Decemeber, 2012)

  • Thirdly, Rising government debt due to cross broader lending to be blamed for such disaster. For example, Greece’s debts became so large that it exceeded the GDP, i.e. The total size of the Greek economy.  As a result the investors demanded higher yields on bonds, which worsen Greece’s depth condition by raising the cost of the country’s debt burden. Due to inevitable chain reaction  the market began to drive up the yields of the bond yields in the other heavily indebted countries in the region. Even non- European countries like USA, Britain, Japan have substantial exposure to bank debt to GDP. It’s the not Euro zone but also the overall world economy is part of the current global economical crisis.
An Overview of the Gross Govt. Debt /GDP

An Overview of the Gross Govt. Debt /GDP

  • Lastly, the overall decision making on financial assistance process within the Euro zone is problematic as it requires harmony among all the member representatives of states. Political decisions are taken by respective countries which affect the economy but monetary decisions are taken by European Central Bank (ECB). But ECB being central bank has limited focus on the overall economy of the respective member countries. In brief, economic policies were formulated and controlled by respective national governments, but monetary policies were controlled by the ECB.


Euro Crisis - Mind Map

Euro Crisis – Mind Map

Cure to this disease: Europeanization of the banking sector

The way, I see it, the only way to cure this poisonous root lies in the basic structural loophole that exists in the Euro zone system. As the Euro zone system has monetary union without a fiscal union. But having both monetary and fiscal unions won’t solve the problem as parliaments would have to give up the right to set taxes and determine public expenditure. Thus, most practical approach would be Europeanization of the banking sector, i.e. Banks would no longer be allowed to hold as many domestic government bonds as countries will have to give up sovereignty. Also, this approach will be more acceptable politically as this will be carried out by the independent European Central Bank. In this way, banks will be less exposed to their national politics thus financial sector stability will be ensured even if a national government has financial problems. Moreover, national governments will not have to worry about national banks’ problems as banks would be recapitalized at the European level. In addition to that, providing funds will be possible as control and supervision of the banking system will be taken place at European level.