You haven’t jumped on the bandwagon and honestly, you don’t understand it anymore.
Here’s a quick overview to get you up to speed.
The financial crisis in Europe
The findings are undeniable: unemployment in Europe today reaches nearly 11% of the active population, a record. Each month, at the current rate of job losses, nearly 200,000 more unemployed are added. In France, for example, nearly 1,500 people lose their jobs every day…
Coupled with this, it should be added that many European countries as well as the whole of Europe are in recession, meaning that growth has been negative for at least two consecutive quarters. Greece, for example, has been in recession for more than 5 years…
Origin of the crisis
Three origins of this major financial crisis that began in 2008 must be distinguished:
- Poor management of public finances: indeed, the sovereign debts of the member countries of Europe increase each year. For many countries, this public debt reaches nearly 100% of GDP. Some countries like Italy and Greece have public deficits of more than 120% of GDP. The origin of these deficits lies in the weakness of public revenues compared to the cost of running the states. In summary, European countries spend too much. They live beyond their means.
- Collapse of real estate markets and the poor financial health of certain banks: the credit crisis mainly comes from the United States but also from Spain. These two countries have in common having speculated on the limitless increase of real estate markets. Thus, US and Spanish banks lent a lot of money to borrowers who could not afford to acquire real estate of the proposed value. These banks thus speculated on the increase of real estate markets to compensate for the financial risk in case of default. Unfortunately, real estate markets collapsed. Borrowers could no longer repay their loans and some banks had to record financial losses, putting them on the brink of bankruptcy.
- Financial speculation by banks: many banks – and so to speak all banks – speculated with the poor financial health of the member states of the southern Economic Union. They massively bought bonds from countries in difficulty whose securities offered in return significant returns, notably Greek debt securities. Unfortunately, these banks never imagined that a country could go bankrupt and default. Yet this is what happened to Greece and to save this country, it was necessary to grant it gigantic reductions on its public debts. In other words, holders of Greek bonds saw their claims reduced by nearly 70%, which once again precipitated banks holding these securities to the brink of bankruptcy. This is exactly what happened to Cyprus, which held a massive amount of Greek paper.
Consequences
There are essentially two consequences to this delicate situation.
- There is a need to reduce public deficits in European countries. In summary, European countries should try to generate revenues greater than their costs, which is not currently the case.
- It is necessary to refinance banks in great financial difficulty. Indeed, banks being the engine of the economy, if these banks no longer have liquidity, they can no longer lend money to the real economy and then the entire production-consumption chain is affected. Currently, this is the case and this explains the recession situation.
Austerity or stimulus?
To stem this situation, two policies are opposed:
- Austerity policies which essentially consist of reducing state spending and increasing public revenues through new tax levies and by reducing social benefits.
- Policies to stimulate economic activity which would consist of promoting production tools to revive economic activity, reduce unemployment and generate new tax revenues.
What future for which Europe?
Europe has gone too far in its social policy and the social model it boasts so much about kills its competitiveness compared to other regions of the world. Under these conditions, the temptation for industrialists to relocate their production is great and this leads to the closures of factories and businesses that we know.
Europe will have to adapt to the realities of other regions of the world to become competitive again, otherwise it is doomed to become an industrial and social graveyard.
Carrying out this economic, social, and political transformation in Europe could well take at least 15 years – notably due to the power of unions and the complexity of our labor codes – which could probably put a generation of workers in difficulty.