Every day in the news, in the media, we hear about the credit crisis and austerity measures to boost growth.
You didn’t jump on the bandwagon and honestly, you don’t understand anything 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. Every month, at the current rate of job losses, nearly 200,000 more unemployed are added. In France, for example, about 1,500 people lose their jobs every day…
Coupled with this, it should be added that many European countries as well as the entire 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
There are three origins to this major financial crisis that began in 2008:
- Poor management of public finances: indeed, the sovereign debts of the member countries of Europe increase every 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 operating costs of 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 some 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 have lent a lot of money to borrowers who could not afford to acquire real estate at 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, the 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 virtually all banks – speculated with the poor financial health of the southern member states of the economic union. They massively bought bonds from countries in difficulty whose securities offered significant returns, notably Greek debt securities. Unfortunately, these banks never imagined that a country could go bankrupt and default. However, 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 pushed banks, holding these securities, to the brink of bankruptcy. This is exactly what happened to Cyprus, which massively held Greek paper.
Consequences
There are essentially two consequences to this delicate situation.
- Public deficits must be reduced in European countries. In summary, European countries should try to generate revenues higher than their costs, which is not currently the case.
- The refinancing of banks in great financial difficulty must be carried out. 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 it is then the entire production-consumption chain that is affected. Currently, this is the case and this explains the recession situation.
Austerity or recovery?
To stem this situation, two policies face each other:
- Austerity policies that essentially consist of reducing state spending and increasing public revenues through new tax levies and the reduction of social benefits.
- Policies to boost economic activity that would consist of favoring production tools to restart economic activity, reduce unemployment and generate new tax revenues.
What future for what 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 factory and company closures we know.
To become competitive again, Europe will have to adapt to the realities of other regions of the world, otherwise it is doomed to become an industrial and social cemetery.
Making this economic, social and political shift in Europe could take at least 15 years – especially because of the power of unions and the complexity of our labor codes – enough to probably put a generation of workers in difficulty.
