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The Euro Crisis of Growth and Debt

By Henry D' Souza

Al-Jazeerah, CCUN, May 15, 2012


          The European Union (EU) had agreed to the Stability for Growth Pact, which stipulated that each country should operate with 3% of GDP or less of debt, and/or a debt/GDP ratio of less than 60%.1    By 2012, the EU was in a recession, which was defined as two consecutive quarters of negative growth.

         In 2010 most countries, starting with Germany, seemed to have exceeded the agreed rates:

Text Box: Debt to GDP Ratio, 2010
	Britain – 80%		Greece – 143			Denmark – 44
	Germany – 83		Italy – 120			Sweden – 40
	France – 83		Belgium – 97			Poland – 55
				Ireland – 96			Slovenia – 38
				Portugal – 93					
				Austria – 72				
				Spain – 60				
	Source: ibid2; and, “Tracking Europe’s debt crisis,”, Nov. 2, 2011






Scandinavian, and a few East European countries, seemed to stick to the guidelines.  Austria has been exemplary in controlling its budget.  The three large powers of the EU, Germany, France, and Britain, could export themselves out of a crisis.  But the PIIGS, Portugal, Ireland, Italy, Greece and Spain needed bailouts.

         Markit’s purchasing managers index for the EU, which measures business activity, fell to a three month low of 47.7% in March 2012.  A figure below 50 indicates contraction.3

         Any recession has social consequences and high unemployment rates are an indication of trouble.  The 2012 unemployment rate for the 27 countries in the EU was 10.2%, or 24.55 million jobless, while in the 17 Eurozone countries it was 10.8%, or 17.1 million unemployed.  The relevant unemployment statistics for the PIIGS was extremely troubling: Portugal, for example, 35.4%, Italy 31.9%, and Spain 23.6%.  The unemployment rate among youth in Spain and Greece was almost 50%.4

         However the future seems bright, if the reputable Standard and Poor’s (S&P’s) prediction is correct.  S & P feels that the EU will pull out of a recession by the end of the year.5

         Several issues arise from these facts: what are the causes of the Eurozone crisis? How did each country handle their problems? Is Europe following the US or is it the other way round? Potential Republican leader Mitt Romney suggests that his rival President Barack Obama is following Europe with socialist policies, like Obamacare. If the globe is interdependent, what are the consequences outside the two Superpowers, USA and EU?

         Starting with the 1970s, doctrinaire neo-con leaders seemed to be propagating the doctrine that markets would correct themselves; theirs was unadulterated laissez faire.  The most prominent advocate of this theory was Fed chairman Alan Greenspan.  When the US crisis proved the conservatives wrong, Greenspan declared openly, but belatedly, that he was wrong.

Text Box: 2010 Debt as % of annual economic output6
	Country			Government debt			Private debt	Total
	Germany		    47%				     164		241
	France			    97				     124		321
	Italy			  129				     181		310
	Spain			    72				     283		355





Regulation was anathema to these conservatives. With derivatives, banks transferred the onus of bankruptcy by borrowers to others.  Cheap money therefore led to increasing debt and a bubble. By 2010 government and private debt of the larger euro partners as a percentage of annual economic output was extremely high. (See table above.)

         Greece was the worst hit.  About $130 billion/€100 billion Greek bonds were held under Greek law, and thus saved the government from bankruptcy, as Greece could re-negotiate the terms.  Another $26.8 billion of bonds were held under foreign law and Greece needed a debt exchange with adjusted payment dates.7 Unemployment in Greece was 20%. Greece seemed to be on the verge of losing its sovereignty as its budget would have to be supervised by the EU, Germany in particular, since it wrote the biggest cheques. 

A 77-year old pensioner-pharmacist who shot himself in front of parliament rather than scavenge for food showed the dire straits that Greece was in.  The public held him as a “martyr for Greece,”8 which has to undergo a painful lowering of its standard of living. 

         The Prime Minister of Luxembourg Jean-Claude Juncker felt that there was an international conspiracy to destroy the euro.  It may have seemed so, but the EU had to take responsibility for overspending.  The Swedish Finance Minister seemed more credible when he said that wicked speculators were behaving like “wolf-packs.”9   These remarks underlined a tussle between creditors and debtors.

         Germany felt that debtors were ungrateful and was reluctant to help.     The accusation that Germany wanted to destroy Greece as it did during the Second World War seemed far-fetched.

Another reason for the euro crisis is that change comes slowly when acceptance is needed of 17 countries in case of the Eurozone and 27 in the case of the EU.  A case in point is the late introduction of fiscal policies for bailouts by the European Central Bank. The ideal would have been for planners to anticipate change, be ahead of the curve, after some sound research.  The Med club is poor at the moment, but given time, industry is likely to shift to the coastal areas, as it did in the US. The southern EU states must attract capital for this move to take place.  In the US, relatively cheap labor is currently attracting motor firms to the South.  

         Lastly, the EU and its ally U.S, are facing severe competition from the BRICS, Brazil, Russia, India, China and South Africa.  The 5-nation BRICS account for 20% of the world’s economy, amounting to $13.5 trillion.  The 2012 Delhi Declaration stated that the BRICS want their currencies to replace, wherever possible, the dollar and the euro, thus reducing transaction costs.10


The Eurozone crisis placed the EU in an awkward situation.  Should the Eurozone be dismantled? Should Greece, the worst culprit, be expelled?  If that were done what would happen when others defaulted? Should the 27 countries assist the 17 or 16 in the Eurozone?  Germany, with the strongest economy, was reluctant to support a huge bailout, especially since it experienced hyperinflation during the Weimar Republic.  But as Germany benefitted from the Eurozone through its exports and lending ability, it had to act responsibly.

         Eventually, after much thought, it was decided to keep the Eurozone intact. The EU decided that its Central Bank should have $1 trillion as a firewall, “the mother of all firewalls,” head of the Organization for Economic Cooperation and Development Angel Gurria declared.11   The head of the IMF Christine Legarde asked EU countries to add another $500 billion in case of additional need – a double firewall.12   Some argue that the firewall should be an impressive $2 trillion.

         A first tranche of €300 billion was already pledged for the PIIGS.  In March 2012, a decision was made for the European Financial Stability Facility (EFSF) to raise the new funds from €500 billion to €750 billion.  A second institution, the European Stability Mechanism (ESM) is expected to play a bigger part, and eventually take over the functions of EFSF.13   Germany eventually pledged €184 billion for the €750 billion tranche.14   While Germany wanted to have money and budget discipline measures, France wanted open-ended loan guarantees, perhaps because it may be one of the countries needing bailouts in the near future.

         Reporter Matthew Lynn is worried about France owing to the rise of the extreme right Le Pen conservatives who are against the euro; in 2010, its debt was the 5th largest in the Eurozone and rising; it is reluctant to change and is less competitive than Germany.15

         Britain has been in a recession since the third quarter of 2010.  Its unemployment rate is 8.3% for adults and intolerably high at 21.9% for youths below 24 years of age.16   In addition it is faced with high inflation owing partly to high oil costs.  But its Markit index is 2.9 percentage points above 50.  Since 2009/10, it has been injecting money into the economy: its QE1 was £200 billion; its QE2 is £75 billion and is likely to rise to £500 billion in stages.17   Though Britain is not out of the woods yet, a tightening of its budget has allowed it to thrive on lower interest rates than those of the PIIGS.

         Spain was required to bring its budget deficit to 4.2% of its GDP but it could not; its target this year is 5.9% but it promises to make up the following year by budgeting for 3%, said Spanish Premier Mariano Rajoy.18   “Spain is in a crisis of huge proportions,” confessed Finance Minister Jose Manuel Garcia-Margallo.  However the country is still considered investment grade.

         The IMF declared that Portugal’s budget deficit of 3.2% was praiseworthy and offered it a loan of €5.17 billion.  Portugal is trying to comply with Eurozone’s restrictions.19

         The euro crisis showed that the EU failed to recognize that it is in a post-imperial era and trickle-down economics may work for the rich, but it takes time for benefits to percolate to low level workers, and the latter are not prepared to wait.

         The relatively successful management of the economy by Austria in Europe, and Canada in North America, also showed that timely adjustments have to be made to synchronize with the vicissitudes of the market.  Obviously, borrowing can be good, but there are limits to how much can, or should be, borrowed.  Household debt for Canada, for instance, is extremely high at 150% of income.

         Another lesson that can be learnt is that drastic cuts to the economy can lead to a depression and social strife, so that provisions in a budget have to be made to allow for growth and a tolerable unemployment rate.

         A larger question needs to be addressed: is the US being Europeanized or is it the other way round?  Mitt Romney felt that Obama’s fiscal and monetary policies were making the US look more like Socialist Europe.  This view was backed by Fellow of Economic Studies Douglas Elliott who suggested that 2012 might be the year when the US imports a recession from Europe.20

         Evidence shows that, for better or worse, the US still leads Europe, shamefully, as it shows that Europeans cannot think and act for themselves. Finnish Minister for European Affairs and Foreign Trade Alexander Stubb noted that the European financial hysteria started in September 2008, 21 when the US started theirs.  The various stages of Quantitative Easing (QE) in the US are now being adopted by Europe.  What QE means in practice is that the European Central Bank (ECB), like the Federal Reserve in the US, should print as much money as is needed to overcome the crisis; in good times, the huge debt can be redeemed, hopefully.  Treasury Secretary Timothy Geithner’s formula seems to be, do what it takes.

         Since European banks were reluctant to lend to each other, as in the US, the ECB had to make cheap loans available to the banks to encourage them to lend again, as in the US.  In simple language, the ECB had to print as much money as is needed without adequate collateral, as in the US.  What is more, the IMF said that the fiscal threat to US growth by the end of 2012 is similar in scale to that posed by the Euro debt crisis.22

         There were other institutions that supplemented ECB effort: ESFS, IMF, and the US, except that this time the help that the US usually gave readily, was non-existent.  The US is the world’s largest debtor nation.  China has also been a willing donor to the EU, when asked.  By March 2012, China’s forex reserves reached $3trillion and its domestic bank lending was 160 billion yuan.  An expert on monetary affairs Domenico Lombardi thought that the ECB could also tap the IMF, since the EU holds 23% of the Special Drawing Rights (SDRs) capital base.23

         Elliott suggests that the US should pay more attention to Europe than it does for the sake of self-interest: the US exports $400 billion annually to the EU; the US has over $1trillion of investments in Europe.  The US has $5 trillion of credit exposure in Europe.24     Finance expert Rana Faroohar adds that Washington needs to pay attention as 80% of Europe’s debt is held by EU banks and the latter hold $55 trillion in assets.  This figure is four times that held by US banks.  The Eurozone contributes to 20% of the global economy and if the Euro fails, the US is bound to be affected.25 

         At least one reporter provided evidence that the US Treasury played an important role in the European crisis.  Chakrabortty26 noted that the International Institute for Finance (IIF), a lobby group of 450 of the largest bankers in the world, arranged the package for Greece.  Charles Dallare, a Treasury official during Ronald Reagan’s Administration and Josef Ackermann, chief executive of Deutche Bank played a “catalytic” role in this deal.  Dallare, probably backed by Wall Street, was behind Greece’s “comprehensive package.” Chakrabortty reported that the IIF admitted to negotiating with various governments on a range of issues to save Greece. 

The US is obviously influencing Europe directly or indirectly.  However, if the Supreme Court allows Obamacare to function as it should, then the US would look more like Socialist Europe.  It should be mentioned that most countries, even developing ones, try to implement universal healthcare, while American insurance companies are trying to place obstacles to their healthcare system through objections to the universal mandate and projections of escalating costs to the Treasury.  The Supreme Court will decide in summer whether Obamacare violates the constitution.

The Euro crisis affects not only the EU but also the rest of the world indirectly.  Take one example in foreign policy.  The US and the Republic of China (Taiwan) signed a defense treaty in late 1954 which was meant to contain Communist China.  With the latter being the US’s largest creditor and the inevitable necessity of the US and China being friends, it is difficult to see how the US can implement this treaty.

The planned strategy for an Arab Spring should be seen in this context of a weak Eurozone and an encircled Israel.

Eric Johnston27 reports that Australia was hit badly by the Euro crisis.  Cash-strapped Euro banks withdrew their investments in Australia to the tune of over US $16 billion: French banks pulled out $4.3b, German banks withdrew $4.6b, and British banks did the same with $5.9b.  Australia’s exposure to the EU was just 1% of their total asset base.  Although Japan, and to a lesser extent other Asian banks, picked up part of the slack, these massive withdrawals are bound to impact on the unemployment figures in Australia.

In times of severe crisis a nation usually forms a unity government.  Israel has done just that. The euro and the American financial crisis took time to affect politics in Israel.  But several other events were going against Israel: the strong possibility that Obama will win a second term and seek a settlement on the 1967 borders; the failure to oust Assad and bomb Iran; the rise of developing countries “bric by bric”; domestically, the need to abolish the Tal Law which exempted orthodox Israelis from compulsory service; and, the hunger strike by 1500 Palestinian prisoners who were resorting to Gandhian tactics, since April 17, 2012, the Palestinian Prisoners’ Day. 

PM Benyamin Netanyahu did a “zigzag” and forged a unity government.  The ruling Likud party wooed the Kadima party, whose current leader Teheran-born Shaul Mofaz was made the Deputy PM.  Netanyahu was expected to call an early election but this was not needed, as he has a super-majority.  Leaders of the smaller parties, Shas, Meretz and Yisrael Beitneinu, cried foul.28     

Abroad, Israel tried to drum up support for its foreign policy by sending President Shimon Peres to Canada on May 7, 2012.  Peres’ trip trailed Netanyahu’s visit in March of the same year.  Peres saw Canada as “never indifferent, never neutral.”


1.      Satyajit Das, “Without wings, sans prayers,”, November 3, 2011.

2.      Ibid.

3.      AP, “Eurozone jobless rate hits record 10.8%,”, April 2, 2012.

4.      Ibid.

5.      “S & P: Europe should pull out of recession in late 2012,”, April 4, 2012.

6.      “What really caused the Eurozone crisis?”, 22.12.2011.

7.      Landon Thomas, “Greece is in a face-off with its bondholders,”, April 3, 2012.

8.      Rene Maltezon, “Greek pensioner who killed himself over austerity measures ‘a martyr.’” Reuters, April 6, 2012.

9.      Charlemagne, “Europe’s 750b euro bazooka,”, May 10, 2010.

10.   Wujiao & Fu Jing, “The fourth BRICS summit,”

11.   Andrew Alexander, “Beware of Spanish practices when a new deal is signed,” the, March 12, 2012.

12., April 1, 2012.

13.   Francesca Landini & Robin Emmett, “EU clears $1 trillion firewall,”, March 31, 2012.

14.   Marko Papic et al, “Europe’s Gordon knot,”, May 21, 2010 has $123 billion, less than this figure.

15.   Matthew Lynn, “Leave la France: it’s the next danger zone in the bondholders’ euro tour,”, May 7, 2011.

16.   Norma Cohen & Sarah O’Connor, “UK recession deeper than first thought;”

17.   Larry Elliott & Katie Allen, “Britain in grip of worst financial crisis, Bank of England Governor fears,”, October 6, 2011.

18.   Andrew Alexander op.cit.

19.   “IMF approves €5.17 billion euro loan to Portugal,”, April 5, 2012.

20.   Douglas Elliott, “2012: The year we import recession from Europe?”, December 20, 2011.

21.   Alexander Stubb, “Will Europe Survive Crisis?”, March 12, 2012.

22.   Kevin Carmichael, “Why the US ‘fiscal cliff’ matters,”, April 26, 2012.

23.   Domenico Lombardi, “The IMF and Eurozone: Weighing unconventional options to stabilize the global economy,” brookings.ed.

24.   Douglas Elliott, op. cit.

25.   Rana Faroohar, “Why Care about the euro? Time, November 7, 2011, 20.

26.   Aditya Chakrabortty, “Why do bankers get to decide who pays for the mess Europe is in?”, April 2, 2012.

27.   Eric Johnston, “Eurobanks repatriate more cash,”, April 27, 2012.

28.   Ruth Pollard, “Surprise deal forestalls Israel’s elections,”, May 9, 2012.


                The Eurozone countries                                      Source:                Timothy Geithner                                                     


Shimon Peres & Stephen Harper


Dr. Henry D’ Souza, retired university teacher who is writing on contemporary world history; his latest books on this subject are World War III or Islamic Liberation” and Must Obama Go?






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