The European sovereign debt crisis! It -- wait, come back. This is interesting, we promise. The debt crisis is one of the biggest stories of the year, maybe of the decade. If you're American, how can you tell whether the situation across the pond affects you?
Take our quiz to find out:
1) Do you like money?
2) Would you rather have money than not have any money?
If you answered "yes" to either of the above, then the Europe situation probably has bearing on your life. Here's a quick explanation of what's happened.
(More of a picture person? Scroll down for graphics that help to explain the crisis)
WHAT IS THE EUROPEAN DEBT CRISIS?
In its most basic form, it's just this: Some countries in Europe have way too much debt, and now they risk not being able to pay it all back. Simple!
There's more to it than that, of course, but when people talk about the "crisis," what they're worried about is that a big, scary, flashpoint event will happen -- like one or more of the eurozone countries defaulting on its debts -- causing investors to panic and triggering a massive banking shock.
The possibility also looms that one or more countries will pull out of the eurozone -- the 17-nation bloc that use the euro currency, which has been around since 1999. Should any of the eurozone nations drop out of this group, it could lead to a rash of bank failures in Europe, and possibly in the United States as well. Under these circumstances, people and businesses who need money might not be able to get any. We'd be looking at depression for Europe and recession for the rest of the world. Some people argue that an orderly, controlled eurozone break-up would be a good thing for certain struggling debtor nations. Still, even this relatively benign scenario carries economic fallout for Europe and maybe beyond.
HOW DID THIS HAPPEN?
The reason everyone is freaking out now is that while some eurozone countries are relatively sound from an economic standpoint, other countries are way over-leveraged, meaning they have too much debt relative to the size of their economies. And the troubles of a few countries could end up affecting everyone, yoked together under one currency for the last decade -- even though their economies functioned according to different habits and enjoyed very different degrees of financial health.
Portugal, Ireland, Italy, Greece and Spain -- gathered under the unfortunate acronym PIIGS -- are some of the most highly leveraged eurozone countries, and most people think that if a disaster happens, it will start with one of them. Italy's debt is 121 percent the size of its economy. For Ireland, that figure is 109 percent. In Greece, it's 165 percent.
The PIIGS took different paths to this scenario. Ireland, for example, underwent a massive real estate bubble, and its banks sustained giant losses. The Irish government wound up rescuing its banks, and now the country is burdened under a huge debt load.
Spain, which now has a 22 percent unemployment rate, also experienced a huge housing bubble. The country didn't indulge in excessive borrowing -- rather, it ended up with high deficits because it couldn't collect enough tax revenue to cover its expenses.
Greece, on the other hand, not only borrowed beyond its means, but exacerbated the problem with lots of overspending, little economic production to make up the difference, and some creative bookkeeping to prevent eurozone authorities from realizing the true extent of the situation.
The deficits weren't piling up everywhere. Countries with strong economies like Germany and France were keeping their output high and their debt at a manageable level. But when 17 nations use the same currency, trouble spreads quickly.
Now that the size of the PIIGS' debt has become clear, investors are getting more and more reluctant to buy bonds from European countries, since many of those countries are heavily in debt -- and the ones that aren't in debt look like they might have to assume responsibility for the ones that are. Investors don't want to put their money into bonds if they think they might not eventually get that money back. And governments in Europe have a lot of debt and not much money -- and it's not clear how they're going to correct this.
WHOSE FAULT IS IT?
Blame often gets cast on the "irresponsible" countries who borrowed too much, taking advantage of the low interest rates available to all euro member nations. However, many argue that it's not right in all cases to blame indebted governments for their own situation, since not every country with high deficits actually engaged in reckless borrowing.
Others say the euro currency itself is to blame -- arguing that the idea that a single currency could meet the needs of 17 different economies was inherently flawed. Typically, a country's central bank can adjust a nation's money supply to encourage or inhibit growth as a way of dealing with economic turmoil. However, the nations yoked together under the euro frequently haven't had that option.
If Spain and Germany hadn't both spent the last several years on the euro, for example, then they wouldn't have been able to borrow at the same low interest rates -- an interest rate set by the European Central Bank, and one that made more sense for Berlin than for Madrid.
Greece might still be shouldering huge debts if not for the euro, but maybe it wouldn't be in a position to take down the rest of Europe with it. And if the PIIGS all still had their own individual currencies, they might be able to export their way out of the mess they're in -- selling goods on the international market until their respective situations were a little less dire. But as it is, they can't.
Alternatively, if you like, you could say the interconnectedness of the modern financial industry is to blame. That's certainly a reason default by Italy or a departure of the eurozone by a fed-up Germany -- to name two examples -- could reverberate around the world.
FROM THE OLD WORLD TO THE NEW
The crisis in Europe could end up affecting the U.S. in some very direct ways. American banks have billions of dollars at risk in European banks. And while that's actually a relatively small fraction of U.S. banks' holdings, the indirect damage could be greater: U.S. business owners could be facing a credit crunch if overseas banks topple.
Further, the U.S. stands to suffer huge trade losses if Europe slips into a recession. Fourteen percent of all U.S. exports go to the eurozone, so weak consumption in Europe spells trouble in the States.
At the moment, a downturn in Europe is the last thing the U.S. needs. Growth is slow in America, and millions of people aren't working who'd like to be. The U.S. needs to be producing and exporting more, not less, and it's already hard enough for small businesses in the States to get credit from banks.
The Great Recession technically ended in 2009, but for a lot of people -- people in poverty, people who can't afford food, people working long hours for low wages -- it feels like things are as bad as ever. A financial emergency in Europe, triggered by some event that sends investors running for cover, could take all of America's problems and make them bigger.
WHAT HAPPENS NEXT?
This is a fast-moving story, and by the time you read this, circumstances may have already changed. As of this writing, though, all of Europe is basically trying to do damage control. European Union authorities have put together a funding package of 150 billion euro for the International Monetary Fund to disperse to debt-stricken eurozone nations, and many countries are using inventive asset-juggling tricks to get capital into their banks without officially bailing anyone out.
Earlier this month, eurozone authorities drew up a tentative proposal to enforce stricter consequences on countries that borrow beyond an agreed-upon limit. The deal would also require eurozone nations to balance their budgets, and aims to bring members of the currency bloc into greater sync from a fiscal standpoint.
EU leaders will meet again on January 30 to further discuss this deal. In the meantime, European governments are doing all they can to soothe investors -- a task made harder by ominous rumblings from credit rating agencies like Moody's, Fitch and Standard & Poor's, which have all downgraded or threatened to downgrade numerous countries and financial institutions in the eurozone and elsewhere. (You may remember Standard & Poor's from the fun downgrade debacle of this past summer, when that agency lowered the United States' sovereign credit rating one notch and caused markets to spaz out.)
At the moment, it's not clear whether any of the curative measures in the works will allow Europe to avoid a major financial downturn. Some onlookers are skeptical that the eurozone nations can reach a workable deal, since the countries have a poor track record of working together on financial matters. And things are likely to remain on a hair trigger even if a deal progresses, since bank-to-bank relationships rely on trust and credibility, and even the perception of a crisis could quickly become self-fulfilling.
Meanwhile, as all this is going on, troubled eurozone countries are pledging to cut back government spending to show they can be trusted -- even though this results in financial misery for the people in those countries, and will in all likelihood make it harder for Europe's economy to gain any momentum in the months to come.
Is there anything you can do about the situation in Europe? Not really -- except keep an eye on it. Disaster isn't a foregone conclusion at this point, but if things do go south on the Continent, the business climate in America will likely get worse before it gets better. You'll want to be able to see that coming if it does.
Below are graphics featuring a country-by-country break down of some of the most important indicators of the crisis :
Debt As A Percentage Of GDP
The Unemployment Rate
Projected Gross Domestic Product
Eurozone crisis live updates:
12/30/2011 5:29 PM EST
Global Stock Markets Lost 12 Percent Of Value, Or $6.3 Trillion, In 2011
Investors in global stock markets lost $6.3 trillion in wealth in 2011 largely because of fears of a eurozone breakup, according to The Financial Times. The value of global stock markets fell 12 percent to $45.7 trillion.
From the FT:
The S&P 500 is flat this year while the FTSE 100 has only dropped 5.5 per cent. But the Eurofirst 300 gauge of blue-chip European companies has lost 11 per cent, led by the French and Italian exchanges. The MSCI Emerging Markets index has shed a fifth of its value despite strong growth in China and other emerging markets.
Asian equity markets were hit particularly hard with Japan’s Nikkei index losing 17.3 per cent this year, Hong Kong’s Hang Seng index 20 per cent and the Shanghai Composite 22 per cent.
12/30/2011 2:08 PM EST
Subsidy Cut Threatens Italy's Newspapers
Up to 100 Italian newspapers will be forced to close after the Italian government slashes subsidies to newspapers in the name of shoring up its finances, according to The Financial Times.
The subsidy cut amounts to a 69 percent cut in funding for newspapers, according to the FT. It was ordered by the government of the previous prime minister, media magnate Silvio Berlusconi, and approved by the new government of Mario Monti. Though the newspaper industry is in decline, some say that these local and sometimes partisan newspapers give voice to stories that the mainstream media ignores, according to the FT.
Staffers at the communist daily Liberazione, which has 5,000 readers, are staging an occupation of the newsroom this weekend to prevent the owners from shutting down the paper after its possible last issue is released on Saturday, the FT reports.
12/28/2011 10:28 AM EST
Investors Unmoved By Lower Borrowing Costs For Italy
Investors were unmoved by the steep fall in Italy's short-term borrowing costs on Wednesday, as Italy's long-term borrowing costs stayed elevated and European stocks fell.
The interest rate on Italy's six-month government bonds fell by half to 3.25 percent at an auction on Wednesday: a vote of confidence in Italy's ability to pay off its debts for half a year.
But investors remained skeptical about Europe's long-term economic prospects. The DAX in Germany plunged 1.04 percent on Wednesday, the CAC in France fell 0.38 percent, and Italy's FTSE Italia All-Share neither gained nor lost ground. The interest rate on Italy's ten-year government bonds remained unsustainable at 6.80 percent.
12/28/2011 10:08 AM EST
EU Admits That Austerity Will Lead To Higher Youth Unemployment
The European Commission admitted in a report in mid-December that its medicine for the sovereign debt crisis may be poison for Europe's long-term economic outlook.
The report said, according to The Wall Street Journal, that the imminent economic slowdown in Europe, caused in part by a contraction in government spending, will worsen job prospects for young people, and "young people remain the hardest hit by the crisis and its aftermath." The report added that "income shocks may prove permanent."
The youth unemployment rate in the European Union is disastrously high at 20 percent, with a high of 48 percent in Spain, according to the WSJ.
12/28/2011 10:05 AM EST
European Safe Haven Deposits Reach All-Time High, Again
The European sovereign debt crisis is turning into a banking crisis.
After breaking a record just a day earlier, the amount of overnight deposits parked at the European Central Bank's overnight deposit facility reached another record high on Tuesday: $591 billion, a 10 percent increase from $538 billion the day before, according to The Wall Street Journal.
The deposits attract an interest rate of just 0.25 percent and could translate into a loss for banks, highlighting the rising level of banks' distrust in any risky lending as banks seek to shore up capital to meet new regulatory requirements.
12/27/2011 3:27 PM EST
Italy Suffers From Worst Christmas Shopping In Ten Years
Italy suffered from the worst Christmas shopping season in ten years, according to the Italian consumer group Codacons, Bloomberg News reported.
Italians spent $62.75, or 48 euros, less per person during the holidays this year than the average of the past five years, according to Codacons.
Shoe and clothing stores suffered the most, with sales in that sector plunging 30 percent compared to previous years, according to Codacons.
As the Italian government seeks to rein in its debt by slashing spending and collecting more in taxes, Italians are cutting back in their spending, which will continue to hurt the economy. Italy's latest austerity plan will cost every Italian family about $1,476, or 1,129 euros, according to the Italian consumer group Federconsumatori, Bloomberg News reported.
The FTSE Italia All-Share, Italy's main stock index, fell 0.85 percent on Tuesday.
12/27/2011 10:18 AM EST
European Safe Haven Deposits Reach All-Time High
Banks parked a record high number of deposits in the European Central Bank's overnight deposit facility, which is considered to be a safe haven, according to The Wall Street Journal.
Banks deposited $538 billion, or 412 billion euros, overnight at the ECB on Monday, up 19 percent from $453 billion, or 347 billion euros, on the Thursday before Christmas, according to ECB data cited by the WSJ.
The high level of overnight deposits reflects the rising level of distrust in inter-bank lending, in conjunction with continued liquidity in the eurozone markets as the ECB lends more to banks, the WSJ noted.
12/27/2011 9:55 AM EST
French Unemployment At 12-Year High
The number of people without jobs in France reached a 12-year high in November, placing pressure on French President Nicolas Sarkozy's reelection campaign, according to Reuters.
France's labor ministry reported that the number of registered jobseekers in France rose to 2.85 million, 1.1 percent more than in October and 5.2 percent more than during the same period last year, according to Reuters.
The unemployment rate in France rose in the third quarter to 9.3 percent from 9.1 percent in the second quarter, according to France's national statistics office, Reuters reported.
12/27/2011 9:39 AM EST
Post-Christmas Shopping Boosts European Stocks
The stock prices of European retailers rose after reports of shoppers flooding stores both in Europe and the United States on Monday, the day after Christmas, according to The Financial Times.
The stock price of German retailer Metro rose 1 percent on Tuesday, France's Carrefour rose 0.6 percent, and Swiss watchmakers Swatch and Richemont rose 0.7 percent, according to the FT.
The DAX stock index in Germany rose 0.23 percent, while the CAC 40 in France fell just 0.03 percent.
12/20/2011 2:11 PM EST
EU Rolls Out Plan To Combat Youth Unemployment
In the face of growing youth unemployment across Europe, the European Commission has launched what it calls the Youth Opportunities Initiative, a program aimed at getting more of the continent's young people into the workforce.
Per a press release from the European Commission, the program will allocate 4 million euro toward getting young people into employment, education or training within four months of leaving school.
At the moment, the EU has a youth unemployment rate of about 21 percent, meaning that 5 million young people are out of work. According to the European Commission, a total of 7.5 million people age 15 to 24 are not employed, attending school or involved in work training.
The lack of opportunities for Europe's young people has inspired protests and riots in some countries and mass migrations in others. The problem is expected to grow worse if Europe tips into a recession, or if the EU's many heavily indebted countries impose austerity measures to rein in deficits.
-- Alexander Eichler
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