If you’ve heard of the phrase “European financial crisis” you are hardly alone. If you invest in the stock market in any way, shape or form, you should already be familiar with this phrase. The European financial crisis is a financial disaster that supposedly took place in 2013. A lot of people think that this crisis is over. A lot of the debates regarding this issue often presented as involving only one country which is: Greece. Since there hasn’t been a massive shock to the global financial system after the Greek-related stock sell-offs in Wall Street and other stock markets, many people have given in to the temptation that the European financial crisis is safely behind us now. But is it? Keep in mind and read the following discussion.
The problem made with the European financial crisis can only be understood if we have a clear idea regarding the European Union. Many European countries formed a monetary union. This currency is called the Euro. There are many countries that have adopted this common currency. In the past, these countries had their own respective currencies such as German Marks, Spanish Peseta and French Francs. By joining the monetary union, all the countries involved had the same currency. The whole idea behind the Euro is that it would make the European financial system unified and more importantly, stable. There was a lot of instability before this. Countries like Italy and Spain would always get under their debt by doing one thing. They would devalue their money by printing out tons of pesetas and lira to cause a drop in the value existing debt that they took out in their home currency. This makes all the sense in the world. For example, I loaned you a hundred dollars and then printed out another hundred dollars, the value of the hundred dollars that you’re holding is half the value from the time that I borrowed the money originally from you. Everybody knew that these countries would be playing these games. The whole idea of the euro was to put an end to the financial instability caused by devaluation and for everybody to play the same rules. Unfortunately, this did not happen.
The root of the European financial crisis is simple. The reason behind the crisis that will continue to happen in the future is the fact that while the European monetary union unified regarding the usage of the euro, the banking systems of these countries did otherwise. In other words, the governments of these European countries were still free to run budget deficits and spend a lot more money than what they are taking in in the form of taxes and customs. Do you see where this is headed? It’s like everybody pretending to stick to the same rules but in reality, they are doing their own thing. This is precisely what happened with the Greek bailout. It did not end the European financial crisis. The Euro partners got together and released billions of euros to bail Greece out. However, if countries like the Greece don’t have discipline regarding their spending, the problem that happened there which is the classic budget-deficit spending will happen again and again and again. This is exactly what is happening in Italy and Spain. Due to the huge deficits run by these economies, they run the risk of triggering another European financial crisis. This is why the Greek bailout didn’t put an end to the crisis despite the fact that it cost us so many billions of euros. You can only bailout economies that are relatively small such as Greece. It is impossible to bailout a country with an economy as big as Italy’s. Sadly, Italy’s is now facing the same issues that Greece is facing.
The whole concept behind the euro is the issue of financial stability. The European monetary union partners don’t want a situation where individual countries would simply get out of their debt and escape their liabilities by simply devaluing their money. The problem with this European monetary union is that for countries to effectively allow a central body to set their financial objectives would be surrendering sovereignty. When the discussion starts to shift to sovereignty issues, people suddenly become nationalistic. As much as modern Europeans would like to think that they are “modern” Europeans, there are still nationalistic tendencies. This is human nature. People don’t like being told what to do specially by people who don’t even live in your country. Sovereignty issue is a big thing and this is why there will always be a European financial crisis until the European Union addresses this predicament that hounds the Euro.
If the sovereignty vs. financial stability issue is not bad enough for you, wait. It gets even worse. The reason that there will be further European financial crisis in the future is the fact that there is a demographic time bomb in the Union. The most dynamic and the biggest economies in Europe like France, Italy, Germany and to some extent, the United Kingdom: have a very unusual demographic set up. They are having less babies. For every young person who can contribute to the economy by paying taxes and working, there are a lot of retirees. This is especially true when it comes to Greece. There are are eight grandparents and one or two grandchildren. You cannot run an economy this way especially in light of the huge retirement entitlements in countries like Germany, Greece, Italy and France. This demographic time bomb is going to get worse unless Europe starts letting in more immigrants or its native populations to start growing again. Considering the demographic trend, the latter is probably not going to happen. As its population ages, Europe will continue to sit in a demographic time bomb. Once the population reaches a certain age, it’s no longer working. Once this number increases, there will be less money to fund retirements and other entitlements.
For the reasons outlined above, it is abundantly clear that the European financial crisis is far from over. It may be that the Greek disaster is finally behind us but it is still the least of the European Union’s problems. The bigger problem is the demographic issue that is plaguing Germany all the way to Spain. Another one is the fact that the European Union cannot solve the sovereignty vs. financial stability puzzle. Considering these facts, there will be another European financial crisis. It’s just anyone’s guess as to which country will be the focus of such meltdown.