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New Year, New Crisis

Uncategorized | February 6, 2012

By Nick Vik

The Eurozone kicked off 2012 on a gloomy economic note with a World Economic Forum annual meeting, which was wrought with negativity and uncertainty. Though a trio of young, topless protestors may have provided Davos with some superficial media attention and internet virility, most eyes remained fixed on the Swiss mountain resort for a different reason: shared hope for some positive news after a tumultuous 2011, which saw fears of economic disaster in Europe careen toward reality.

In truth, anything written about the future of the Eurozone becomes outdated almost immediately. With that said, an examination of the vital features of the integrated Eurozone economy, as well as its underlying political and economic trends, can offer some indication about the region’s financial and economic future.

While the Eurozone crisis’ can be traced to the advent of the Greek Sovereign debt crisis almost two years ago, economic tumult has now consumed the region as a whole, moving beyond Greece to states like Portugal, Spain, Ireland, and Italy. This group of states, called Peripheral Europe by many economists and analysts, suffers from sovereign debt issues, which have led to skyrocketing interest rates on government bonds. This has led major agencies to slash their debt ratings, citing major concerns of potential default.

For most of 2011, Core Europe managed to contain the economic cancer in danger of inflicting Peripheral Europe. Analysts at major financial firms attribute this to the persisting long-term investment value in France and Germany, as well as in the BeNeLux countries, particularly among the countries’ blue-chip companies. Moving in to 2012, Europe’s economic outlook largely hinges on the ability of Core Europe to distance itself from its Peripheral European counterparts. Unfortunately, a number of indicators suggest that the success of this plan might be limited. Most importantly, Germany, the Eurozone’s economic darling in many ways, reported negative growth rates for Q4 of 2011, despite major austerity measures to shore up its economy. A country is deemed to enter recession after posting two consecutive quarters of negative growth.

The second major proposal—perhaps the defining factor of the Eurozone crisis as it moves into 2012—is a contingency plan in case of a Eurozone nation’s default and the bailout it will likely necessitate. While European leaders have continued to strongly endorse political, economic, and social integration, countries have been at odds with respect to a major intervention in the economies of peripheral Europe. To make matters worse, the IMF has cited major concerns regarding its ability to finance rescue packages for the growing number of European nations in danger of default and further economic crisis.

Overall, the outlook for the Eurozone appears bleak. From rising concerns about the ability to protect nations from default, to the inability of distressed economies to take fiscal policy into their own hands, European leaders are faced with a diabolical collection of economic challenges. These obstacles have lead to heated economic and political confrontation in the region, as well as 16 economic summits over the course of the crisis thus far. These summits have confirmed leaders’ commitment to maintaining the unity of the Eurozone and protecting its economic future, but have done little to address the most important question of all: what will happen when it all hits the fan?