What started out with Greece is now spreading to other European countries. I’ve written extensive about the Greek Financial crisis and the Euro over the past few months as it became clear that this was not an isolated problem and may threaten the entire Euro Zone.
It’s no secret that 2010 has not been kind to the European currency, and for those who were wondering when the Euro will recover, it seems that there may be additional declines in value before we see a turnaround.
The reason is the huge financial crisis in Greece and the fear that this will spread to other European countries.
Just to give you some idea of the scope of the problem, Angela Merkel, the current Chancellor of Germany, said that Greece itself will need a bailout of 100-120 billion Euros! (over 150 billion US dollars).
As Germany is the strongest economy in the Euro zone, the eyes of investors are turned to it to see whether they will help Greece out and how. So far, the Germans have not made it clear just how they plan to help out, especially when they have serious issues with how the Greeks are handling their economy.
To make it short and to the point, the Germans want to be sure that the Greeks can pay back their debt and that their bailout money, when and if it is given, will not be wasted.
The Problem Spreads
However, it may be too late to contain the Greek problem. Earlier today, the credit rating, S&P cut down the credit rating of Spain from AA+ to AA, signifying that additional cuts may be forthcoming. This came in the wake of yesterday’s credit rating cut for Portugal.
Earlier this week, Greece’s cradit rating was cut down to a level more common to junk bonds, showing how skeptical investors are the Greece will be able to pay back its loans.
Now, the prospect of an end to the Euro Zone becomes more clear and threatening. The problem is that there are diverse economies in the Euro Zone, some strong such as Germany, France, Netherland, and others very weak such as Greece, Spain, Portugal, Italy, and so on.
It’s very difficult to create a single monetary policy that will suit all these nations. In addition, the degree of solidarity between them is just not enough to support each other in a productive manner in times of crisis.
What’s left is floundering economies that may pull down the stronger ones.
What needs to happen to protect the Euro
1. Greece needs to take drastic, and painful, steps to improve its economy and reduce spending. Greece has one of the biggest government sectors in the world with massive employees benefits. Germany wants to see a move towards greater efficiency.
2. Germany will need to step up with money to support Greece (and perhaps Spain and Portugal).
3. Other Euro countries will need to chip in as well.
4. A new system of financial controls will need to be set in place within the Eurozone to prevent such crises from spreading again.
The Value of the Euro
In the mean time, the future seems very bleak. I see no way for the Euro to recover until Germany and France issue a firm commitment to help their weaker partner countries overcome their financial problems.
Even when that happens, it will likely mean a lower Euro due to greater spending and even the printing of more money.
