How did 19 countries abandon their own currency for the Euro? How did it cause the Eurocrisis? How is the Euro managed and mismanaged? I wrote this episode in such a way that even if you know almost nothing about economics, you will still understand it. So enjoy!
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The European Union is compromise upon compromise by 28 different-thinking countries, balancing between keeping national sovereignty or giving it up for the greater good, for the European project to function properly. the EU is a tower of ductape. This is shown perfectly in action with the Euro.
To be part of the Euro you must adhere to 4 criteria: your country’s spending must be less than 103% of its income, your debt less than 60% of your economy -GDP-, and have low inflation and interest rates. Any EU country who achieves these goals must join the Euro. Except Denmark and the UK, who have special opt-outs. The initial countries to join the Euro were Portugal, Spain, France, Luxembourg, Belgium, Netherlands, Ireland, Germany, Finland, Austria, and Italy. Greece joined in 2001, Slovenia 2008, Malta and Cyprus 2008, Slovakia 2009, , Estonia 2011, Latvia 2014, and Lithuania in 2015.
Normally, when you have control over your own currency. You simply print more money to pay off debt, salaries, and social welfare. This lowers the value of your currency, meaning your products become cheaper for foreign consumers and for tourists. This is how most countries got out of the recession. Well this had become impossible with the Euro. Low prices for a struggling economy is good. But when your currency loses value, it becomes more expensive to buy goods from abroad. Not a big deal for struggling economies, you won’t be buying a lot of foreign products anyway, you don’t have the money. But if your economy is doing well, such as Germany or France, raising prices isn’t likely to get you re-elected. And without Germany or France backing your idea, it ain’t gonna happen. So the best and easiest way to solve your crisis is gone. “But large countries like the USA find a way to support their poorer regions as well, don’t they?” The USA has many systems in place to transfer money from rich regions to poor regions via unemployment benefits, healthcare for the poor, and government investment projects. In the EU, this is impossible. Sure, Dutch citizens gladly spend their taxes on other poor Dutch citizens, ask them to pay for other poor European citizens in Greece, you’ll most likely hear a resounding ‘NO’. Most people in the USA feel like US citizens. Most people in the EU feel Irish, German, Dutch, etc. So, imagine now you are Greece. What can you do?
As the largest economy in Europe, everybody looked at Germany to help pay for the debt. If these 5 countries couldn’t pay their loans back, then European companies could go bankrupt. If nothing was done, France might go bankrupt next, and then… Germany. So, Germany reluctantly agreed on the condition that these 5 countries adopt the German way of government spending. Germany, and most northern European countries, are generally very financially responsible, collects all their taxes, and people expect little in government support. This was not so in most southern European countries. ‘If you want OUR money. You need to adopt OUR morals’. Meaning these 5 countries had to cut spending, borrow less, and repay current debt. Great idea, right? Hmmm, not so much. For one, the government is by far the largest spender in any economy. Cutting government spending means fewer jobs, less government investment, and lower pensions. These people might no longer afford a car, meaning the car salesmen has to fire someone or go bankrupt, meaning they can’t buy as many groceries, meaning a supermarket firing employees, and on and on it goes until you reach the high unemployment rates we see today.
And so, we are left with a country staring into financial abys because politicians borrowed too much, countries didn’t want to give up their sovereignty, and bankers issuing bad debt. So can another Eurocrisis happen? Unlikely. But the Euro still has many flaws: it’s ruled too much by Germany, doesn’t help the poor regions who are in trouble, and the countries are too culturally diverse when it comes to government spending.