Great Expectations: The Eurozone Debt Crisis

By Sofiya Mahdi

In these times of tumultuous economic uncertainty, there lies a strain that permeates the socioeconomic spheres of all nations. As globalization increases both culturally and economically, any economy in a precarious position poses a threat to stability. The crisis facing the eurozone has dominated headlines as Greece faces dire economic circumstances and nations including Italy and Spain are faced with downgrades on their credit ratings from Standard and Poor’s. Naturally, this brings about panic in global markets, with the ambiguity of an entire region’s future clouding around a financial crisis that has already promised a year of austerity and re-evaluation ahead. In addition, we should brace ourselves to witness countless rounds of talks between influential financial figures and European state leaders as a solution to the crisis is ironed out.

Naturally, we must ask ourselves, how did this crisis come about? According to an article on the BBC, back in the ‘90s, leaders in the eurozone had agreed to limit borrowing to approximately 3% of their nations’ output. Unfortunately, nations such as Italy, Greece, France, and Germany all deviated from the agreement, and therefore debt steadily accumulated even further.

Nevertheless, the somewhat irresponsible borrowing patterns of the governments were not the only contingent at fault in this dilemma. The private sector’s consistent borrowing further deepened the debt, posing a tough choice for leaders of these debt-ridden nations. Spending cuts inevitably lead to public discontent and anguish, risking an increase in unemployment. However, should these cuts not occur, collapse may be inevitable as markets react negatively to such a decision. It appears the complexity of the crisis arises from attempts to cut losses as much as possible.

In such dire circumstances, one may naturally plead for divine intervention. Relief could potentially arise in the form of the International Monetary Fund, an organization which is seeking to loan approximately $500 billion dollars to aid the eurozone in abetting the financial crisis. The outrageous sum of money is needed in order alleviate the crisis, but is still short of the projected $1 trillion dollars the IMF believes is needed to aid countries in such fickle markets.

In The New York Times article, “I.M.F. Seeks $500 Billion More to Lend as It Plans to Cut Growth Forecast,”, the news comes with an additional disheartening caveat: the IMF’s outlook on projected growth has taken a decidedly pessimistic turn. According to the article, even with these large sums of money, a complete European bail-out will be unlikely without considerable cooperation from the nations involved. Conversely, the crisis has seen “bond yields [rise] for countries like Brazil, Turkey, and India.”

This volatile economic situation places further pressure on the impending World Economic Forum being held in Davos, Switzerland from January 25th to the 27th. A high-powered gathering which attracts the most influential politicians, CEOs, commentators, and many more to the picturesque Swiss mountains to discuss the state of the global economy. Yet, as stated in The Washington Post article, “VIPs tackle 2012 at Davos forum clouded by economic uncertainty – and igloo protesters,” any such gathering of this nature is bound to attract controversy and anger. The abundant snow fall has fuelled “igloo protests” spearheaded by the Occupy movement. This will no doubt draw more of the world media’s attention to the economic crisis, which is already a constant on everyone’s mind, including the 2,600 attendees of the conference.

Let there be no doubt that the eurozone crisis will be high on the list of urgent topics to discuss at this year‘s economic forum. Perhaps given such enormity in a single agenda, participants of the conference will instead focus on specificity in deals between companies rather than overwhelming generality in fixing the global economy. One can be certain all eyes will be watching proceedings closely, although definitive action and a consensus on one solution will most likely not emerge from a solitary conference. However, what the forum in Davos can do is set a solid foundation for future talks on salvaging a floundering European economy. The stage is set for productive communication and decisiveness, now it is up to those who attend to become catalysts for economic reform.

SOURCES:

1. 1.     The Washington Post:VIPstackle 2012 atDavosforumcloudedbyeconomicuncertainty _ andiglooprotesters
2. 2.     BBC:Whatreallycausedtheeurozonecrisis?
3. 3.     The New York Times:I.M.F. Seeks $500 BillionMoretoLendasItPlanstoCutGrowthForecast