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Background
Only months ago, the European Union (EU) received the Nobel Peace Prize primarily for pioneering the integration of Europes currency via the euro and the European Central Bank (ECB)1. After enduring deleterious wars and deep ideological divisions, the continent has achieved a great peacemaking success with the development of the European Union.
Now, however, countries like Greece and Cyprus have fallen into deep economic recessions with no sign of improvement in the near future. The economic volatility of these nations poses a challenge to the EU, but the longer the ECB waivers in its decisions, the more catastrophic the situation becomes. For the first time in 2010, the no-bail out clause delineated in the EU treaties had been overhauled to avoid the economic collapse of Greek banks2. Now, this clause was once again violated to protect Cyprus from bankruptcy. Cyprus economy is characterized mainly by its bloated, over-extended banking sector. Many wealthy Russians choose to keep deposits in Cypriot banks because of the deregulation policies instituted by the country. However, in recent years, risky investments and growing debts have caused leading banks to fail and as a result Cyprus has entered a crippling recession. The EU forced the nation to downsize its swollen banking sector by imposing forced losses on deposits of over $100,000. Additionally, Cypruss largest bank, Laiki Bank, will be forced to close down. However, even with these mandates, Cyprus will require a giant bailout from the EU in order to reach economic stability. The first bailout payment of 10 billion euros will be issued in early May3. These bailouts have drawn the ire of several European institutions. Members of German Chancellor Angela Merkels council have encouraged the removal of nations with failing economies like Greece and Cyprus from the Euro. In fact, the possibility that Greece will be removed from the Euro-zone is so foreboding that it has been given the catchphrase The Grexit. Others, like the new Eurosceptic Party in Germany, have called to dissolve the euro altogether. However, at this point in time, only about 25% of the German population is unsupportive of the euro4. The general conclusion is that dissolving the euro brings an uncertainty that is less favorable than the present-day economic crisis.
FIGURE 1: Net support of the euro for the three leading Eurozone economies: Germany, France, and Italy
FIGURE 2: Net support for the euro from the EA-8 (Austria, Belgium, Finland, Ireland, Luxembourg, the Netherlands, Portugal and Spain) as well as Greece
It is difficult to gauge as to whether Eurozone residents truly approve of the shared banking system or whether the prospect of dissolving the euro is just to frightening to conceive. As for nations outside of the Eurozone, support for the ECB has fallen dramatically. In the UK especially, support for the euro has fallen a full 65% since the fall of 2011. Greece with 53% and Slovakia with 54% were the only two member states where a majority of those polled felt that the euro was beneficial to the economy8. The rest of the Eurozone finds itself stuck between a rock and a hard place, the future of the euro may seem dismal but without the euro their situation would become apocalyptic.
Figure 3: Global Stock Market Crash as a result of Lehman bankruptcy on September 15, 2008
A Grexit would likely cause investors in Spain, Portugal, and Italy to lose confidence in their financial institutions which may result in bank runs and bankruptcies in these member states. Interest rates would then escalate and this lasting result would impede not only other countries in Europe but also the U.S., China, India, Brazil and other major, developing economies who are major exporters to the Eurozone12. The next logical step would be for countries like Spain, Italy, and Portugal to secede from Eurozone which would only magnify losses. In the wake of such
secessions, economic analysts from Citigroup suggest that the value of the euro could reduce to just $1.0113. History indicates that when a society is plunged into economic ruin, societal and political divisions quickly ensue. As harrowing as the statistics may be, the most disturbing impacts of a Grexit may not even be quantifiable.
Through Figure 4: Under-25 youth unemployment rates across various Eurozone member states as well as the Eurozone as a whole from January 1990 to January 2012
Through national awakening sessions that focus on Greek mythology, Greek history, and Christianity, the Golden Dawn brings citizens back to a time in which Greece was home to the greatest civilization on Earth20. A Grexit would only make the harrowing economic situation worse. Additionally, the citizens of Greece would likely feel betrayed by the European Union which was supposed to be a unifying force in Europe. The illwill harbored by Greek citizens would make them even more inclined to join in these nationalistic albeit racist and violent causes. If the Golden Dawn Figure 5: Depiction of the Golden Dawn flag which has a stark resemblance to the swastika adopted by the Nazi Party or the Syriza Coalition were to rise to power, Greece would quickly be alienated by the rest of the developing world and deep political rifts in Europe would ensue. Cyprus also suffers a wavering socio-political fabric. Recently, Cyprus spent a week uncertain of its fate. If a bailout program was not agreed upon, Cyprus would likely be forced to secede from the Eurozone, and would have to construct a new economy out of nothing. When the banks were closed just weeks ago, Cypriots lamented the closed restaurants, cafes, and markets which lined streets. Defeated citizens, like photographer Patrick Baz, were only left with defeated remarks such as It may not be war, but you can put a country down without firing a single bullet.21 Even the former finance minister, Takis Klerides, had this to say of the EU We found out the hard way that its not a family [] Its becoming a dictatorship.22 Evidently, forcing member-states to leave the euro would harbor distrust of the EU as well as tarnish the morale and the way of life of the entire population. To avoid rehashing political schisms that the EU was put in place to mend, it is essential that all precautions are taken to avoid having to remove countries in crisis from the Eurozone.
oversee banks within the Eurozone could ward off financial indiscretions that go on to negatively impact the entire continent. The Stability and Growth Pact signed in 1998 strove to achieve this degree of regulation by surveying the fiscal state of each member state annually and preventing any nation from incurring a deficit that exceeds 3% of the GDP24. The pact was spearheaded by Germany who feared inflation after the creation of the euro. However, the agreement quickly lost clout when Germany itself, as well as France, entered a recession and developed a deficit of over 3% of their respective GDPs25. This demonstrates that a Eurozone regulatory commission should be unaffiliated with any particular nation. Instead, it should deal directly with the financial institutions that comprise the Eurozone area. A far superior plan is that outlined by the European Stability Mechanism which has recently become a new agency in the European Union. Under this program, the ECB will issue loans and bailouts directly to financial institutions in the Eurozone. This is a much more directed approach as it essentially allows the ECB to circumvent national borders and supply aid directly to the banks rather than the governments. A central fund of money will allow the ECB to provide about 500 billion in loans26. Unfortunately, the needs of certain nations like Greece and Spain exceed this value. However, taking these measures to secure the fate of countries in recession and their failing banks will help to prevent financial contagion which could infect the entire Eurozone and in turn, the entire world economy.
Conclusion
Stuck between a rock and a hard place, Europe desperately awaits the panacea to its fiscal problems. Nations like Greece, Cyprus, Portugal, and Spain are entering their fifth or sixth year of debilitating recession, and many are beginning to feel that the creation of the Eurozone has done more harm than good. Although the deficits of Greece and Cyprus have been skyrocketing in the past few years, events from our past tell us that a Greek or Cypriot exit from the euro would have unprecedented, virulent effects. Even though the recent bailouts of Cyprus have angered many other member states, it is not the time to make drastic changes to the euro. The public is not ready to handle more stressors to its economic system. Instead, by joining the Eurozone together even more with a single regulatory commission, it is possible to make the Eurozone more of a union and less of a system in which wealthy nations simply bailout struggling nations. It is important to remember the significance of establishing the euro in the first place. It was the very first time in history that a group of nations united in such a drastic way. To hastily repeal this symbol of collaboration and peace in a continent that spent much of the last century torn apart by war would be crushing to the morale and economic stability of Europe. Protecting the Eurozone is about protecting the financial, social, and political fabric of Europe.
Andrew Higgins, European Officials Accept Unions Nobel Peace Prize, The New York Times, December 10, 2012 (http://www.nytimes.com/2012/12/11/world/europe/european-union-officials-accept-nobel-peace-prize.html)
2
Liz Alderman, Andrew Higgins, and James Kanter, E.U. Officials Agree to a Deal Rescuing Cyprus, The New York Times, March 24, 2013 (http://www.nytimes.com/2013/03/25/business/global/cyprus-and-europe-officialsagree-on-outlines-of-a-bailout.html?pagewanted=1&_r=0)
4
Anna Manchin, Europeans Gain Optimism About Their Financial Situations, Gallup, Inc., http://www.gallup.com/poll/145421/Europeans-Gain-Optimism-Financial-Situations.aspx (March 27, 2013)
6
Felix Roth, Lars Jonung, Felicitas Nowak-Lehman, Crisis and Public Support for the Euro, Vox, November 5, 2012 (http://www.voxeu.org/article/crisis-and-public-support-euro)
7
ibid
Public Discontent: Europeans think Euro is Bad News, RT, http://rt.com/business/euro-zone-poll-researchunhappy-067/ (March 27, 2013)
9
Thomas Fischer and Thieb Petersen, Domino Effect of Grexit Could Cause Global Wildfire, Public Service Europe, http://www.publicserviceeurope.com/article/2646/domino-effect-of-grexit-could-cause-global-wildfire (March 24, 2013)
10
Landon Thomas Jr., Examining the Ripple Effect of the Lehman Bankruptcy, The New York Times (http://www.nytimes.com/2008/09/15/business/worldbusiness/15iht-lehman.4.16176487.html)
11
Mark J. Perry, World Stock Markets Rally to Pre-Lehman Levels, Carpe Diem, http://mjperry.blogspot.com/2010/12/world-stock-market-rally-to-pre-lehman.html (April 6, 2013)
12
Grexit Could Have Lehman Effect, RT, http://rt.com/business/greece-euro-exit-effects-467/ (March 24, 2013)
13
Katie Martin and Laura Clarke, Economists React: What Happens If Greece Leaves the Euro Zone? Wall Street Journal, March 22, 2012 (http://blogs.wsj.com/economics/2012/05/22/economists-react-what-happens-if-greeceleaves-euro-zone/)
14
15
Profile: Syriza- Greeces Radical Coalition on the Left, BBC Monitoring, May 7, 2012 (http://www.bbc.co.uk/news/world-europe-17980954)
16
K.H., Golden Dawns National Awakening Sessions, The Economist, March 4, 2013 (http://www.economist.com/blogs/charlemagne/2013/03/greek-politics)
17
Helena Smith, Greece Election: Rise of the Far Right, The Guardian, May 1, 2012 (http://www.guardian.co.uk/world/2012/may/01/greece-election-rise-far-right)
18
19
Becket Adams, Disturbing Development: Greek Neo-Nazi Party Surges to Popularity, The Blaze, September 20, 2012 (http://www.theblaze.com/stories/2012/09/20/disturbing-development-greek-neo-nazi-party-surges-inpopularity/#)
20
21
Tara Maclsaac, Life in Cyprus Amid Financial Turmoil, The Epoch Times, March 27, 2013 (http://www.theepochtimes.com/n3/4107-life-in-cyprus-amid-financial-turmoil/)
22
Joshua Chaffin, Cyprus Laments End of Way of Life, FT, http://www.ft.com/intl/cms/s/0/f3d20432-931d-11e29593-00144feabdc0.html#axzz2OnnzXdJK (April 3, 2013)
23
Barroso: ECB Should Monitor All Euro Zone Banks, RT, http://rt.com/business/ecb-banking-union-euro-zonebarroso-958/ (April 5, 2013)
24
Stability and Growth Pact, European Commission: Economical and Financial Affairs, http://ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm (April 3, 2013)
25
What is the Stability and Groeth Pact? The Guardian, November 27, 2003 (http://www.guardian.co.uk/world/2003/nov/27/qanda.business)
26
Andrew Walker, Q&A: European Stability Mechanism, BBC News: Business, October 8, 2012 (http://www.bbc.co.uk/news/business-19870747)