The 2008 Real Estate Debacle affected not only the banks and economy in the United States but also those in Europe and other parts of the industrial world. And like conditions during the Great Depression each country or region has had to fend for itself, work its way through the economic disaster.
The United States followed a method of creative monetary policy, adding gradually trillions of dollars to its national cash flow in order to bring about a return to the direction of prosperity. In essence it created and added 85 billion dollars a month to its economy for well over two years. The result of this was partial recovery with national unemployment dropping to slightly over 5 percent.
(It should be added that had Congress also applied fiscal policy unemployment would probably be down to 2 1/2 to 3 percent. But that would today be impossible with a Republican majority in both Houses of Congress.)
The European Central Bank (ECB) is the equivalent of the Federal Reserve, controlling monetary policy for its 19 member Eurozone economy. Mario Draghi, the director of the ECB has begun their version of creative monetary policy to bring about economic recovery within the 19 nations that make up the Eurozone. It should be remembered that this economic union was initially called The Common Market.
The European Central Bank will buy $69 billion or 60 billion euros in bonds each month until September 2016. They do not have the mortgage dilemma that had existed in the United States but they do have a debt crisis in a small number of their member states that they are currently essentially attempting to ignore. The ECB is beginning this process with traditional monetary policy. But even this is a radical step for the ECB because they will be adding 60 billion euros to the cash flow every single month. This will be done by buying back bonds.
In all they will be adding a total of over one trillion euros. Where is all this money going to come from? The ECB will print it and add it over a twenty month period. At the end they will be adding 1.2 trillion euros to the Eurozone cash flow.
Remember, currency has no real value. There is nothing behind it but the word of the agency or country that provides it. This is true for all nations today because there are not enough precious metals in existence to conduct all the business that occurs within and among all the nations. The value of this currency is set in the nations using the money by their governments and by what other countries are willing to trade for it.
There are several major problems the Eurozone is facing. To use a historical example: When the United States was first formed during and immediately after its Revolutionary War in the late 19th Cwntury its government consisted of thirteen separate states and a Continental Congress made up of representatives of these states. In order for Congressional legislation to pass, each of the individual states had to sanction it. Also only the states could tax. Congress had to request money from each of the states which each of the thirteen states could send or not send. What existed was 13 sovereign states with an essentially powerless central government.
This is largely what exists in Europe today, nineteen sovereign nations that largely speak different languages who have bound themselves into an economic union. Some are wealthier and more efficient than others. It is to everyone’s advantage to belong to the union but some of the members are currently in dire straits.
In the period prior to 2009, some of these countries using creative bookkeeping, which was largely created for them and their citizens by large American banking houses like Goldman Sacks, slowly incurred extensive debt. The basic premise, I assume, was similar to that used by the banking houses in the United States that their increasing prosperity would grow the debt out of existence. At the end of 2008 the Housing Industry collapsed in the U.S. shrinking economic growth throughout the world and leaving these nations and many of their citizens hopelessly in debt.
The Eurozone is a monetary union of nineteen European states that have adopted the euro as their official currency. They are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Other European states are getting ready to join and some have adopted the euro unilaterally.
The current major problem facing the ECB is deflation. Their Gross National Product (GDP) has been slowly shrinking; it is currently down .02%. This means, particularly with their population slowly increasing, that the average standard of living for most of the people is slowly dropping. In order to avoid this and to begin growing the GDP again the ECB will, using monetary policy, increase the cash flow throughout the Eurozone by 60 million euros per month for about twenty months. Obviously they believe that this will reverse the current pattern. Hopefully in this they are right.
The euro tends to be a far better currency than most of the 19 nations had before the Common Market. It has been between 1.2 to 1.5 percent above the U.S. dollar. The only currency that has been higher has been the British pound which has been between 1.5 and 1.7 cents above the U.S. dollar.
All the nations involved have benefited from this economic union, but all these countries are not economically equal, and all of them have otherwise remained independent sovereign nations with strong feelings of nationalism. Currently Greece, which had a youth unemployment level of 53.5% in November of 2014, had its government for a number of years borrowing off the books billions of euros. In November of 2010 Eurostat revised the debt of Greece putting the deficit at 15.4% of GDP and public debt at 126.8% of the GDP. This was the greatest deficit among all the EU member nations. The European Central Bank (ECB) bailed Greece out with money and an austerity package.
Despite the austerity measures, possibly because of a continuing recession, the deficit continued to grow and in the beginning of July 2014 there was a second bailout of one billion euros that was due to be paid back in late July. Greece ended its six year recession in the second quarter of 2014 but was still facing, economic and political instability and heavy debt
There has been spontaneous protests strikes, heavy unemployment, and large scale discontent ever since the bailout loans were first made. In the January 25, 2015 Election the Left Wing Syriza Party won the majority position with 149 out of 300 seats, 36% of the popular vote. The second, out of the 20 functioning political parties in Greece, was the (NO) New Democracy with 27.81% of the vote.
Syriza campaigned as the anti-austerity party. They are a radical left-wing political party whose platform was to end Greece’s austerity measures. In a manner of speaking by the way they voted the Greeks held out their middle finger to the European Central Bank (ECB).
It’s understandable in a country which, for whatever reason, has been in an ever increasing recession for the last seven years, has seen its GDP decrease about 25% and unemployment rise above 25%, with the ECB now asking for further austerity.
The new Prime Minister, Alexis Tsipras, has promised to renegotiate the country’s 270 billion bailouts. He is also seeking forgiveness for most of Greece’s 270 billion euro debt. He has pledged to reverse many of the austerity reforms, such as cuts in pensions and the minimum wage and public sector layoffs.
Germany and France want the ECB to adhere to the original austerity agreements; in a sense they want to continue to punish Greece and the other nations who overspent and received bailouts from the ECB. Some of the other countries are Spain, Portugal, Ireland, and Italy. In Spain a radical left party is presently organizing protest marches in the country. They may well emulate Greece in their next popular election.
As of now nothing has been done. The European Central Bank has put off any possible settlement for several months. What will happen then is anyone’s guess.
The ECB needs agreement from all its members in order to act. If it demands that the austerity continue then Greece will be forced to leave the Eurozone and go back to its old currency, the Drachma, and eventually be forced to declare bankruptcy since at the present it is at the point of needing another bailout for which its new prime minister swears he will never ask. If, at that time, the ECB accepts a compromise it will be establishing a precedent that will apply to the other nations that have overspent in the past and need or will need bailout funds.
All this is an interesting dilemma! This is particularly true since the euro has no intrinsic value. Additional funds can be printed and issued as needed. In fact this is the Monetary Policy plan that the ECB is about to start that will hopefully reverse the current deflation cycle the Eurozone is presently undergoing.
This problem is another result of the U.S. Real Estate Bubble bursting in late 2008 and causing a world-wide recessions. Both the Eurozone and U.S. property dilemmas were caused by the major banking houses.
In the United States the Federal Reserve, with the approval of President Barak Obama, by its monthly purchase of 45 billion dollars’ worth of mortgage paper, essentially forgave a large percentage of the multitude of homeowners who found themselves over their heads in debt on their homes. The result of this has been to solve the multi bundling of mortgages and return the housing industry to sanity and to move the country largely in the direction of economic recovery. Hopefully the dual actions will eventually occur.
Ultimately the ECB will have to take a similar type of action, largely forgiving the debt of the few nation’s that are currently in dire straits and add over a trillion euros to their overall economy or see the Eurozone largely fall apart. And if this happens and the Eurozone is largely broken up then Europe could see a return to the conditions of 1929 when each individual nation had to fend for itself during the time of the Great Depression.
(Footnote: Many of my readers have asked me questions in their comments. I carelessly did not number the original publication of “The Weiner Component #114.” However all the questions are answered in that blog: “Responding to Your Enquiries.”)