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The Causes of the Eurozone Crisis

Believe it or not, the Euro has been around in its current form since 1st January 1999 when all the member currencies were joined together.  However, at that point there was still no physical Euro currency, it was just that the exchange rates of Francs, Deutschemarks, etc were 'permanently' fixed in value in relation to each other - 1 Euro was equal to 1.96 Deutschmarks, 6.56 French Francs, 1936 Italian Lira (yes, that many), etc, etc (source:

The physical currency as we know it today appeared on 1st January 2002 and there was then a period of weeks when the old currencies were exchanged for the new one.

The arguments for a single currency were numerous but were focused on the existence of a 'single market' in the European Union and the idea that one market should have one currency - this would lead to clearer prices between countries, no exchange rate risk when doing business, a reduction in the costs of doing business and encouragement of more trade.  The United States has one currency - why can't Europe?

In order to join the club you had to prove that you met certain criteria - that your inflation rate, growth rates, and levels of government debt were within certain boundaries.  This was so that you could avoid having economies with huge variations and a potential situation where one country had high inflation and high growth and another was in recession.

Eventually it was thought that there would be movement of goods, service, capital, labour, etc, between countries and everything would even out leading to more efficiency, greater economies of scale, lower prices and higher growth rates.

However, when some countries joined, particularly Greece, a number of economists suggested that they weren't meeting the criteria to join and had too much government debt; there was also a feeling that the state of their economies were too different from economies such as Germany.

Initially no issues arose from this but once the 'credit crunch' hit and economies started struggling it became clear that countries such as Spain, Portugal and Greece did not have the underlying economic strength to deal with it.  Were they not in the single currency they could have even lower interest rates in order to encourage growth (having said that. Eurozone interest rates are very low) and could also devalue their currencies in order to make their exports cheaper and encourage growth that way.  As it is they are now tied to the policies of the whole Eurozone and have no room for manoeuvre.

Of course, part of this problem is their own making due to the large amount of government debt they have accumulated by spending much more than they were getting in taxes.  They are not the only governments to have done this but the markets do not feel they have the underlying ability to cope with the levels of debt and consequently are demanding high rates of interest to lend to them.

If the Eurozone was truly one currency in one 'country' then the central bank would step in and help out with the debt.  However, convincing German and French citizens to back the debt of other countries is a big ask and this is one of the flaws in the Eurozone project.  Would you like to see your tax money supporting debt built up by another country?  Probably not.

So what happens now.  Another blog required I think.

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