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Is the Eurozone Out of Crisis?

eurozoneThe European Union has been in an economic recession for the second decade in a row. Some speculate that growth in the more stable economies such as Germany could pull the other countries out of turmoil.

However, the German economies’ growth rate recently shrunk to 0.1 percent. This is an unwelcome figure because it was projected to be much higher.

The problem remains. The European Union has yet to bounce back after the 2008 financial crisis. Many countries are still lagging behind with slow growth rates. The European Central bank is at the forefront of the problem.

It is often cited that the European Central Bank fails to boost economic growth. Jean-Claude Juncker, the EU Commissioner, recently revealed a new plan to pump 300 billion Euro into the EU member states in order to stimulate growth.

France and Italy are two big countries that run large deficits and decrease economic growth within the EU. The French government was able to boost their economy through spending, which has propped it up for the time being. However, France’s private sector has continued to perform dismally and bring down the economy.

One of Europe’s major issues continues to be trade. Because the EU relies heavily on exports for revenue, decreased commerce with trading partners has negatively affected their economy. Policymakers believe that the low price of gas will drive down energy costs and have consumers buying more goods.

Germany champions austerity measures while other EU member states and policymakers cringe. Strict control over the financial markets of other countries has done little to benefit the economy. Meanwhile, some people look toward investment as the way the EU could escape from the current economic turmoil.

Lack of private investment in businesses is also a major problem for the EU, and it is something the ECB is looking to address with the 300 billion Euro investment plan.

For the time being, it does not look like the ECB has the ability to pull the EU out of its long-standing recession. Economic growth could be possible with the new spending measures to boost investment; however, the diversity of the Northern economies versus the Southern member states’ economies remains to be a distressing issue for the EU.

Strong economic growth in the U.K. and the U.S. means these countries will be more likely to buy EU exports, which will benefit the EU economy greatly.

– Maxine Gordon

Sources: The Guardian, Bloomberg, DW
Photo: Flickr

Cyprus Bailout Negotiations Continue

cyprus-protests
After scrapping a potential bailout deal which would have seen money taken directly from citizens’ deposit accounts, Cyprus is struggling to reach a new agreement that can set it on a path to economic prosperity. The European Central Bank (ECB) set Monday as the deadline for Cypriot action if the government wants to receive the proposed €10 billion ($13 million) in funds to keep banks afloat.

If a deal cannot be reached, there is a large danger of a bank run in Cyprus, a phenomenon which occurs when too many depositors try to withdraw their funds from a bank at one time. With fractional-reserve banking, a financial institution does not actually keep everyone’s money, using some of it to lend to customers seeking a loan. In return, depositors are paid interest on the sums in their accounts. When banks are known to be on the verge of collapse, fearful depositors will naturally want to take all their money out to put it somewhere safer. If everyone does this at once, the banks will not have enough money to fulfill all the demand for cash, creating even further complications for their finances. A bank run would devastate the entire Cypriot economy, ruin the confidence of international credit markets, and potentially set the stage for Cyprus to leave the Eurozone.

The group of lenders known as the “troika,” comprised of the European Commission, the International Monetary Fund (IMF), and the ECB, is demanding that €5.8 billion for the Cyprus bailout be funded by the country’s government. The proposed deposit tax that was scrapped is expected by some to return in the final version of the deal, because the alternative would be to dip into pension funds, a much more controversial tactic. Cyprus is allegedly considering implementing capital controls in order to prevent too much money from leaving the country when banks reopen on Tuesday.

– Jake Simon

Source: New York Times
Photo: The Guardian