European Debt Crisis
In an easy way it's just this: Some countries in Europe have ways too much debt, and now they risk not being able to pay it all back.
Simple! There's more to it than that, of course, but when people talk about the "crisis," what they're anxious about is that a big, creepy, flashpoint event will happen -- like one or more of the euro zone countries failure to pay on its debts -- causing investors to be frightened and triggering a gigantic banking shock.
The chance also looms that one or more countries will draw out of the euro zone -- the 17-nation bloc that use the euro currency, which has been around since 1999.
Should any of the euro zone nations drop out of this group, it could show the way to a rash of bank failures in Europe, and possibly in the United States as well.
Under this position, people and businesses who need money may not be able to get any.
We'd be looking at gloominess for Europe and recession for the rest of the world.
Some people quarrel that an orderly, controlled euro zone break-up would be a good thing for certain fraught debtor nations.
Still, even this relatively caring scenario carries economic outcome for Europe and maybe beyond.
The explanation every person is freaking out now is that while some euro zone countries are comparatively sound from an economic point of view, other countries are way over-leveraged, sense they have too much liability relative to the size of their economies.
And the troubles of a few countries could end up disturbing everyone, yoked together less than one currency for the last decade -- even if their economies functioned according to diverse habits and enjoyed very different degrees of financial health.
Portugal, Ireland, Italy, Greece and Spain -- gathered under the unfortunate acronym PIIGS -- are some of the most highly leveraged euro zone countries, and most people believe that if a calamity happens, it will start with one of them.
Italy's debt is 121 percent the size of its economy.
For Ireland, that figure is 109 percent.
In Greece, it's 165 percent.
The PIIGS took different paths to this scenario.
Ireland, for example, underwent a enormous real estate bubble, and its banks constant giant losses.
The Irish government wound up rescuing its banks, and now the country is held back under a huge debt load.
Spain, which now has a 22 percent unemployment rate, also experienced a huge housing bubble.
The country didn't indulge in excessive borrowing -- rather, it ended up with high deficits because it couldn't collect enough tax revenue to cover its expenses.
Greece, on the other hand, not only borrowed ahead of its means, but exacerbated the problem with lots of profligacy, little economic production to make up the difference, and some inspired bookkeeping to prevent euro zone authorities from realizing the true extent of the situation.
Now that the size of the PIIGS' debt has become clear, investors are getting more and more unenthusiastic to buy bonds from European countries, since many of those countries are seriously in debt -- and the ones that aren't in debt look like they might have to assume responsibility for the ones that are.
Investors don't want to put their money into bonds if they think they might not ultimately get that money back.
And governments in Europe have a lot of debt and not much money -- and it's not clear how they're going to correct this.
Blameworthiness often gets cast on the "negligent" countries who borrowed too much, taking advantage of the low interest rates available to all euro member nations.
However, many quarrel that it's not right in all cases to charge indebted governments for their own situation, since not every country with high deficits really occupied in reckless borrowing.
Others say the euro currency itself is to accuse -- arguing that the idea that a single currency could meet the requirements of 17 different economies was intrinsically flawed.
Typically, a country's central bank can adjust a nation's money supply to promote or inhibit growth as a way of dealing with economic chaos.
However, the nations yoked together under the euro regularly haven't had that option.
If Spain and Germany hadn't both spent the last several years on the euro, for example, then they wouldn't have been able to borrow at the same low interest rates -- an interest rate set by the European Central Bank, and one that made more sense for Berlin than for Madrid.
Greece might still be shouldering massive debts if not for the euro, but maybe it wouldn't be in a situation to take down the rest of Europe with it.
And if the PIIGS all still had their own individual currencies, they might be able to export their way out of the mess they're in -- selling goods on the international market until their particular situations were a little less dismal.
But as it is, they can't.
on the other hand, if you like, you could say the interconnectedness of the modern financial industry is to blame.
That's certainly a reason default by Italy or a departure of the euro zone by a fed-up Germany -- to name two examples -- could resound around the world.
The crisis in Europe could end up upsetting the U.
S.
in some very direct ways.
American banks have and while that's actually a relatively small fraction of U.
S.
banks' holdings, the indirect smash up could be greater: U.
S.
business owners could be facing a credit crisis if overseas banks topple.
Further, the U.
S.
stands to suffer giant trade losses if Europe slips into a recession.
Fourteen percent of all U.
S.
exports go to the euro zone, so weak consumption in Europe spells nuisance in the States.
At the moment, a downturn in Europe is the last thing the U.
S.
needs.
Growth is slow in America, and millions of people aren't working who'd like to be.
The U.
S.
needs to be producing and exporting more, not less, and it's already hard adequate for small businesses in the States to get credit from banks.
The Great Recession exactly ended in 2009, but for a loy of people -- people in poverty, people who can't afford food, people working long hours for low wages -- it feels like stuff are as bad as ever.
A financial emergency in Europe triggered by some incident that sends investors running for cover, could take all of America's problems and make them bigger.
Simple! There's more to it than that, of course, but when people talk about the "crisis," what they're anxious about is that a big, creepy, flashpoint event will happen -- like one or more of the euro zone countries failure to pay on its debts -- causing investors to be frightened and triggering a gigantic banking shock.
The chance also looms that one or more countries will draw out of the euro zone -- the 17-nation bloc that use the euro currency, which has been around since 1999.
Should any of the euro zone nations drop out of this group, it could show the way to a rash of bank failures in Europe, and possibly in the United States as well.
Under this position, people and businesses who need money may not be able to get any.
We'd be looking at gloominess for Europe and recession for the rest of the world.
Some people quarrel that an orderly, controlled euro zone break-up would be a good thing for certain fraught debtor nations.
Still, even this relatively caring scenario carries economic outcome for Europe and maybe beyond.
The explanation every person is freaking out now is that while some euro zone countries are comparatively sound from an economic point of view, other countries are way over-leveraged, sense they have too much liability relative to the size of their economies.
And the troubles of a few countries could end up disturbing everyone, yoked together less than one currency for the last decade -- even if their economies functioned according to diverse habits and enjoyed very different degrees of financial health.
Portugal, Ireland, Italy, Greece and Spain -- gathered under the unfortunate acronym PIIGS -- are some of the most highly leveraged euro zone countries, and most people believe that if a calamity happens, it will start with one of them.
Italy's debt is 121 percent the size of its economy.
For Ireland, that figure is 109 percent.
In Greece, it's 165 percent.
The PIIGS took different paths to this scenario.
Ireland, for example, underwent a enormous real estate bubble, and its banks constant giant losses.
The Irish government wound up rescuing its banks, and now the country is held back under a huge debt load.
Spain, which now has a 22 percent unemployment rate, also experienced a huge housing bubble.
The country didn't indulge in excessive borrowing -- rather, it ended up with high deficits because it couldn't collect enough tax revenue to cover its expenses.
Greece, on the other hand, not only borrowed ahead of its means, but exacerbated the problem with lots of profligacy, little economic production to make up the difference, and some inspired bookkeeping to prevent euro zone authorities from realizing the true extent of the situation.
Now that the size of the PIIGS' debt has become clear, investors are getting more and more unenthusiastic to buy bonds from European countries, since many of those countries are seriously in debt -- and the ones that aren't in debt look like they might have to assume responsibility for the ones that are.
Investors don't want to put their money into bonds if they think they might not ultimately get that money back.
And governments in Europe have a lot of debt and not much money -- and it's not clear how they're going to correct this.
Blameworthiness often gets cast on the "negligent" countries who borrowed too much, taking advantage of the low interest rates available to all euro member nations.
However, many quarrel that it's not right in all cases to charge indebted governments for their own situation, since not every country with high deficits really occupied in reckless borrowing.
Others say the euro currency itself is to accuse -- arguing that the idea that a single currency could meet the requirements of 17 different economies was intrinsically flawed.
Typically, a country's central bank can adjust a nation's money supply to promote or inhibit growth as a way of dealing with economic chaos.
However, the nations yoked together under the euro regularly haven't had that option.
If Spain and Germany hadn't both spent the last several years on the euro, for example, then they wouldn't have been able to borrow at the same low interest rates -- an interest rate set by the European Central Bank, and one that made more sense for Berlin than for Madrid.
Greece might still be shouldering massive debts if not for the euro, but maybe it wouldn't be in a situation to take down the rest of Europe with it.
And if the PIIGS all still had their own individual currencies, they might be able to export their way out of the mess they're in -- selling goods on the international market until their particular situations were a little less dismal.
But as it is, they can't.
on the other hand, if you like, you could say the interconnectedness of the modern financial industry is to blame.
That's certainly a reason default by Italy or a departure of the euro zone by a fed-up Germany -- to name two examples -- could resound around the world.
The crisis in Europe could end up upsetting the U.
S.
in some very direct ways.
American banks have and while that's actually a relatively small fraction of U.
S.
banks' holdings, the indirect smash up could be greater: U.
S.
business owners could be facing a credit crisis if overseas banks topple.
Further, the U.
S.
stands to suffer giant trade losses if Europe slips into a recession.
Fourteen percent of all U.
S.
exports go to the euro zone, so weak consumption in Europe spells nuisance in the States.
At the moment, a downturn in Europe is the last thing the U.
S.
needs.
Growth is slow in America, and millions of people aren't working who'd like to be.
The U.
S.
needs to be producing and exporting more, not less, and it's already hard adequate for small businesses in the States to get credit from banks.
The Great Recession exactly ended in 2009, but for a loy of people -- people in poverty, people who can't afford food, people working long hours for low wages -- it feels like stuff are as bad as ever.
A financial emergency in Europe triggered by some incident that sends investors running for cover, could take all of America's problems and make them bigger.
Source...