What is EuroZone Crisis?
| Italy recently had its election and quite expectedly the people voted against “austerity” measures. The party who spoke of austerity was vanquished. Unemployment rates have been soaring. The economy is shrinking. Their debt is 150% of their GDP. At such times one of the tools available with government is to tinker with the currency. Unfortunately the Italians cannot do so because they share their currency with other nations of the EURO region. To understand their predicament one needs to imagine the EURO ZONE as a train. Now imagine the various countries as the bogies (compartments) of this train. Let’s say the train is trudging along smoothly and all seems well. Suddenly a few of the passengers in the “Italy” bogie fall sick. So, they send a request to the engine driver, via a telecommunication contraption that is fitted in the bogie, to speed up. They need to reach their destination fast as they are feeling unwell. The engine driver then sends a message to all the other bogies that they have received a “speed up” request from the Italians due to an emergency. On hearing this announcement, the German passengers seated in the German bogie take serious objection. They want to enjoy the journey at a leisurely pace and vehemently object to the “speed-up” suggestion. Their contention being that they had paid a premium for enjoying this leisurely journey and were not prepared to get short-changed. They caution the engine driver that if he were to “speed up”, then they would demand a refund. The engine driver finding himself in an “impossible” situation is left with no choice but to maintain status quo. The poor Italians are left with no choice but to suffer their ordeal. One of the Italians regrets his decision to have travelled by train. He feels that had they travelled by their own car, the decision of speeding up would have been theirs. But now since they are a part of the train, they can do little to influence its speed. The situation in Europe is similar to the story of the Euro train. The common currency, “EURO” is like the train. Some countries like Greece, Italy, Spain, Portugal, and Ireland are not comfortable with the valuation of the EURO (it is exactly how the Italians were not comfortable with the speed of the Euro train). These countries are facing a slow down and need to revive their economy. One of the best ways to do that is to sell more products to the world and reduce debt. And in order to do that, it is vital to devalue the currency. But since the currency (EURO) is common for all the countries, just a handful countries cannot decide about changing the valuation of the EURO all by themselves. This is just like how the Italians in the EURO train failed to “Speed- Up” the train. For countries like Germany and France who are not in a “debt” problem like the Italians and Greeks, a reduction in the value of the EURO works against their interest because it unnecessarily makes their imports more expensive and prices of commodities in general increases. Basically the tinkering of the currency works in opposite ways for two sets of countries. Had Greece or Italy had their own currency, they could have easily devalued their currency to make their exports more attractive. This would have boosted their economy by creating demand and thereby jobs. This would be like their having to travel in their own car instead of being part of a larger train. Hope the above example would have helped you to understand the currency dilemma that is causing concern to several European countries like Greece, Italy, Spain, Portugal and Ireland who find themselves sinking in debt. Also, hope this article has also clarified why some other countries of the European Union like Germany do not share the needs of the weaker nations and hence their currency strategy runs opposite to that of the troubled nations. | |
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