On October 26, two members of the Italian Parliament were caught fist fighting in the middle of a meeting over new Italian financial reforms. They grabbed each other around the throat, as other members grabbed the two brawlers, pulling them away from each other.
What is the true cause of these two grown men attacking each other? The answer is simple: The Euro crisis.
Clearly, this financial dilemma can put people under great strain, as it envelops the economy of a continent. Not only does this crisis affect the current economic state, but if the situation worsens, the future one will suffer as well. On top of that, the job market will be severely crippled. That means many of my peers and I will have a tougher time finding jobs after college and our expenses will be harder to pay. That is why I believe many teens should know more about this topic, as it affects their short and long term futures.
First, some basics about the Eurozone. The Eurozone came into existence on January 1, 1999, and contains 17 countries, including Belgium, Ireland, and Spain. Essentially, the Euro is a single currency that replaced the past currencies of these Eurozone countries. This currency system was designed with a "we're all in this together" motto -- if any one of the countries gets into trouble, the other ones will help it out. This system also allowed for easy trade, a stronger currency, and unification between these countries. The Euro permitted these countries with weaker currencies to come together and form one of the most powerful currencies in the world. Overall, it seemed like a good idea at the time, but these ideas would later come back to haunt the Euro in just under a decade.
In 2009, Greece was in serious economic trouble. It was hit particularly hard by the global recession because of its low taxes and young retirement ages. Greece's government also had misreported the amount of debt it had so that its investors would not get worried. This lying only made them more anxious. Not only did Greece have its economic woes, but investors had also lost confidence that Greece would ever recover from its debt crisis. Other countries such as Ireland, Spain, Italy, and Portugal had also been hit hard by the recession, but none as bad as Greece. Germany, which has had a relatively successful past couple of years, emerged as the economic leader of the Eurozone. Germany's Chancellor, Angela Merkel, has now become one of the most powerful leaders in Europe.
So far, Europe's leaders have been using a couple of key tactics to try to stop this economic malaise. The most prominent strategy has been austerity measures, which consists of raising taxes, lowering spending, and cutting programs such as education and health care. Austerity has been implemented in the PIGS countries (Portugal, Italy, Greece, and Spain), but there have been mixed results. Although some countries have done relatively well with austerity, like Ireland, and Ms. Merkel and other European leaders have stood by austerity measures, journalists and writers disagree. In his book Naked Economics, Charles J. Wheelan states, "Raising taxes or cutting spending during a recession will almost certainly make it worse." In a September op-ed in the New York Times, Paul Krugman says austerity is "inflicting vast pain," slowing growth and causing riots in Greece and Spain over lack of government services. Not to mention this lowering of spending usually causes mass unemployment as government jobs are cut.
Besides Greece's problems, Italy also has its issues, even though its economy is not as bad. Italy's prime minister during the majority of the crisis was Silvio Berlusconi, who was most well known for his numerous sex scandals, perjury, and corruption. Berlusconi rarely was focused on the economy, and sat idly by while his economy went into a downward spiral. Making little reforms and not focusing on the economy, Berlusconi was one of the major causes of Italy's financial ruin.
But why does Italy matter if its economy is not as bad as Greece's? Italy is the third-biggest economy in the Eurozone, much bigger than Greece's. If Italy defaults (its debt gets too big to handle), the Euro cannot stay afloat. While Greece's debt can be handled with bailouts and restructuring of their debt (trading in high-interest debt for low-interest debt), Italy's cannot. If Italy fails, Europe fails.
So how do we solve this crisis? First of all, stop the austerity measures. I know it seems like a good idea and all, but it's not! Paul Krugman and I agree: Do something else, please! Instead of implementing reforms that slow growth, Europe should be implementing growth reforms (such as creating new jobs or looking for new sources of revenue). Another, more risky reform, is devaluing the Euro so that it is less expensive to buy European goods, promoting European exports. Not to mention that focusing too much on fiscal reforms leads to neglecting political reforms. Although the economy needs fixing, the economy only got this way because of the Greek government's lying and political instabilities.
Second, the Eurozone leaders will need to cede sovereignty (give up power). One of the major problems for the Euro is the united fiscal policy. Although Germany wants less inflation, and Greece wants more, both countries will have to use the same policy. More likely than not, Germany, the more powerful economy, will get its way, and Greece will be hurt as a result. If the power to choose what fiscal policy to use was given to a political leader or group, with the state of the Euro and not the state of a particular country in mind, these problems could be offset. Thirdly, more funds will have to be given to the European Central Bank. The ECB, similar to the U.S. Federal Reserve, provides money for bailouts and debt restructuring. The ECB and similar organizations like the European Financial Stability Facility (EFSF) are truly needed in case of a Greek default.
So clearly, this crisis is extremely important to Europe, and the rest of the world. Although the situation is bad, there are solutions out there that can be used by Europe's leaders. I hope this article educated you about this ever-changing event that can alter our very future. Europe's failure means a decrease in the global economy, alliances with Europe being tested, and probably, a double-dip recession in the U.S. economy. If the Euro goes down, there is a chance we may go with it.