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Causes of the Euro crisis
"Something was rotten in the state of Denmark", and nobody wanted to know.
The Euro crisis began to make itself felt after the Greek elections in 2009 when the seriousness of the public debt situation came to light. Among the key factors that led to this crisis and block a solution are certainly the following:
1) At the Euro introduction the Greek government manipulated the deficit figures supplied to Brussels with the aid of a complex currency swap deal worked out by Goldman Sachs. At that time this was widely suspected but the other prospective Eurozone members chose to ignore the matter in favour of having a larger zone. The instrument was compatible with the EU regulations yet hid $1 billion of the Greek debt. Italy and probably other countries undertook similar measures for the same purpose.
- "THE MAJOR CAUSE". A serious system defect of the Euro was obviously underestimated at the introduction, and has not been corrected since: a common currency but no common economic and fiscal politics. After having satisfied a set of minimal prerequisites for joining the Eurozone1, the national economies drifted apart. While each country had its specifics, a distinct dichotomy (polarization) emerged within the Eurozone:
- Under the impression of now owning a "hard" currency, the southern Eurozone members experienced an investment boom. This meant that private and public debts grew, wages and salaries rose, unemployment rate dropped, imports dominated over exports, the social security expenditures went up. In Greece in particular, corruption boomed2, producing a further drain for public funds.
- After the exceptional conditions posed by the re-unification3, in Germany a culture of "tightening belts" in public expenditures dominated: efforts to keep new debt below the stipulated EU limit of 3% of GNP e.g. through privatization of state-held enterprises and reductions in expenditures for social security, communal and other services. Wages and salaries stagnated, even dropped. And the export surplus rose and rose, with little or no effect on the employment rate.
The economic boom or "bubble" in the South that was strongly correlated with Germany's export boom produced a steady stream of money from South to North. So during this decade Germany profited enormously from the introduction of the Euro4. The pitfall into which the South was heading only became visible after the world financial crisis 2007-2009.
- "CIRCUMSTANCES THAT FUELED THE CRISIS AND KEPT IT GOING".
- ALL POWER TO THE FINANCIAL SECTOR: Since the 2008-2009 world financial crisis the three rating agencies i.e. S&P, Moodys and Fitch, continue to excercise huge power over the decisions of investment banks and hedge funds, despite the blatant failure of these agencies to foresee this catastrophe, and despite the intransparency of their assessments. Massive downgrades of ailing Eurozone members well-nigh in weekly intervals and noticeably hard on the heels of every aid agreement. As if anything of note in the economy or the public debt situation would change at such speed. It is very difficult to avoid the conclusion that the southern Eurozone countries are consciously being prevented from refinancing their debt5. And this despite the fact that the Eurozone itself has less debt than either the USA or Japan.
- "CONSISTENTLY WRONG ORIENTATION OF (MAINLY GERMAN6) POLITICS". No apraisal of the actual causes of the crisis was undertaken, at least no public hint. The crisis was seen narrowly as a debt problem for which only the stricken country is responsible. A solution was seen purely in the fulfillment of debt reduction through austerity measures without consideration of economic recession, of galloping unemployment, and of all other social consequences. The fatal role of the rating agencies was totally ignored, as was the Euro system defect. The banks and not the taxpayers were (are still) being protected. Propagandistically Germany was presented as (lone) paymaster and all others more or less as dole recipients.
"STUMBLING BLOCKS FOR AID MEASURES": A short-sighted ban for the others to come to the aid of a member in financial distress (the "no bailout clause") - intended as a means to prevent the spreading of problems of an individual Eurozone member to the others, and as an incentive to maintain financial discipline, this ban failed in a situation where a sizeable portion of the Eurozone economy had serious problems. Also in light of today's massive international speculation culture (fuelled by the rating agencies). It was necessary to find and agree on workarounds.
2) From which also the German and French weapons industry profited in that more weapons systems could be sold to Greece than Greece needed or had the money to pay for.
3) Contrary to popular belief, it was a case of a large predator swallowing the smaller partner - the economy of the East was ruined overnight by means of a forced unrealistic currency exchange rate (MarkEast:DM = 1:1), after which the assets in the East (the "spoils") were obtainable at a rock-bottom price (if not entirely free) by West enterprises. The Chancellor then was the conservative Helmut Kohl. See for example the TV documentation "Beutezug Ost – Die Treuhand und die Abwicklung der DDR [Foray East - the Trust agency for privatization of GDR state-owned enterprises and the clearing and settlement of the GDR]" broadcast by ZDF/Frontal21 on 14.09.2010.
4) The first visible effect on German exports came unexpectedly with a noticeable dip in August 2012. Until then the dependency on the health of the other Eurozone countries appeared to have been ignored in German business and political circles. Over half a century a line of thought had ingrained itself into the national identity: "Hard work and diligence pays off. And the most visible reward is the positive export balance". Exporting had virtually become an Olympic discipline. The view has been: we are doing it right. Those with negative trade balances are doing it wrong. They must change their ways, become like us.
5) See also the Study by the University of St Gallen/Switzerland on suspicious characteristics evident in rating statistics.
6) The same standpoint has been taken by the Netherlands and Finland. But these lack Germany's power of veto. See also Chris Bowlby's BBC article on the parallel with Europe's historical religious schisma.