What a troubled marriage the eurozone has become. Just like most distressed marriages, finances are at the root of the issues. In the eurozone case, it’s too much debt caused by overspending that may result in the unwinding of the European Union. While a noble concept in theory, the European Union is in the midst of grave difficulties managing the finances of its member states.
Right now, Greece is the worst case scenario in the eurozone. The island nation has a debt that’s 113% of its GDP. This is particularly troubling since the EU limits its member nations to a GDP debt ratio of just 60%.
Debt troubles have also spread rapidly to other nations such as Portugal and Ireland. These countries were quick to cooperate with the EU austerity measures to qualify for bailouts. However, Ireland just posted a surprise fall in GDP and GNP with its economy slipping back into a recession. And although the Portuguese government agreed to austerity, its citizens rebelled with a strike that disrupted transportation nationwide. As a result, many are saying that Portugal risks the same fate as Greece should the austerity measures continue.
Considering Greece as a precursor for what’s to come in other European Union nations, the picture is not pretty.
Greece, even after its second bailout was approved, continues to deny it has a problem and blames the EU for using the tiny country as a scapegoat for the EU’s incompetence. At the same time, warnings are issued by the European Commission that economic growth in the eurozone will come to a virtual standstill. As you can imagine, as this trouble brews, eurozone nations have their credit ratings downgraded across the board by rating agencies.
Finally, Greece agreed to austerity measures and was able to pull off a debt swap in order to qualify for another round of EU bailout funds. However, rumors are rampant that the nation will not honor its commitment to austerity. What will happen if Greece doesn’t stick with the austerity measures is anyone’s guess. They may lose their status as a member of the European Union or perhaps another bailout deal would be arranged. It all depends on the political climate at the time.
Provided the timeline and the facts, the eurozone debt crisis appears far from over. The band-aid economic fixes simply delay the inevitability of countries eventually being forced to leave the EU. It looks like there is going to be more pain on the horizon and potentially a breakup of the European Union. But only time will tell.
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