By Jessica Chen, CE '14
The European crisis only seems to become increasingly complicated as the situation continues. The political climate is extremely hostile with multiple power transfers and government reforms. Georgios Papandreou, former Prime Minister of Greece, stepped down after popular demand for a unity government to tackle the debt crisis and was shortly followed by Silvio Berlusconi, former Italian Prime Minister, who also resigned this past Saturday after a seventeen year regime due to a loss of support even from within his own party for similar reasons.
The situation in Italy is proving itself to be of greater concern than that of Greece. Italy, the third biggest economic country in Europe, has a public debt of 120 percent of its gross domestic product, causing investors to lose trust in the Italian financial market and borrowing costs to increase to record highs. The European Financial Stability Facility was created as a special bailout fund set aside to help nations with financial crises, however the funds are too minute to bail out a large country like Italy. Suggestions on using the European Central Bank as the euro zone’s lender has been strongly resisted by Germany as it would destabilize the Bank that ties the euro zone together and increase inflation of the euro. Unlike Greece, Italy poses actual global economic risks. With an economy too large for Europe to bail out or to allow defaulting, many economists wonder if the euro crisis has moved on to a whole new level.
The economic troubles have also caused an increase in tensions within the euro zone with more stable nations such as Germany and France becoming reluctant to risk their own country’s economy and financial markets to save those of the nations that are in danger. Currently, there has been talk of a reevaluation of the idea of a centralized currency within Europe and whether or not more stringent rules and qualifications should be necessary for countries to be included in the euro zone. Germany, France, and other more stable nations have become wary of supporting their fellow Europeans and are concerned for their own national economy. However this proposition was quickly dissolved as much opposition has been made against this idea, as it would create a “two-speed Europe”. The nations that were in danger of getting dropped from the currency would face a much more difficult path of reviving their country’s economic stability, creating a drastic difference in the economic health among European nations.
The world is far from seeing an end to the euro crisis. Greece marked the global awareness of the seriousness of the economic situation and need for immediate attention. Italy then followed with a larger public debt and last Thursday, Standard and Poor’s mistakenly downgraded France from its AAA rating, which caused a sell-off in French government bonds. Although a mistake, the incident reflected how France, considered one of the more stable nations, is also being affected by the crisis and is at the margin of its credit ratings.