Cracks in the Eurozone: Causes and Consequences

During summer holidays Europe usually looks like a quite spot, business activity goes down, peace and calmness govern at stock exchanges and in the banking sector. Currently, the situation is quite different.

The euro zone countries face unusually turbulent developments. Some of them are suffering financial catastrophes and send SOS signals to their partners. The latter promise some help in response, put forward their own terms, but still are tight with the lifelines.

Meanwhile, the European exchanges are in a fever going through a cacophony of exchange rates, stocks, bonds and other securities. Prudent employers and central banks seek to get rid of the junk papers and buy gold bullion. As a result, stocks and bonds fall in price, while gold price rockets.

On the back of such turbulent events social tensions grow in all the EU member-states, which acquired a huge army of unemployed. For example, in Spain they account for 25% of the working population. Greece, Portugal and several other countries imposed a strict regime of saving budget funds for social services, education, cultural development. In response they face mass protests, strikes, and growing confrontation.

Several weeks ago the European Parliament president Martin Schulz warned that Spain’s economic crisis could spark a “social explosion” across the continent. “The demonstrations in Spain show that a social explosion is looming because of the high unemployment rate among young people in Europe,” Schulz told the wide-circulation German daily Bild.

Warnings to this effect, the signals of an impending disaster, good advice go to Europe from all over the world. "We believe that ...Europe is sleepwalking toward a disaster of incalculable proportions... The sense of a never-ending crisis, with one domino falling after another, must be reversed," the Institute for New Economic Thinking (INET), backed by veteran investor George Soros, wrote in its report.

But to do this is not easy. In order to stop or at least to slow down the avalanche of the financial, economic and social crisis, one needs really big money and the consent of the debt-laden nations to perform all the essential requirements. German Chancellor Angela Merkel has clearly indicated her position on the matter. "We remain completely within our approach so far: help, trade-off, conditionality and control. And so I think we have done something important, but we have remained true to our philosophy of no help without a trade-off," she pointed out.

This statement means that the troubled states, as they are known to experts, should be strictly in line with the prescribed radical reforms under control of the EU Commission and the creditor countries.

Here arises a very important question: how come a large group of countries have found themselves in a deep debt pit, and are facing urgent necessity to carry out serious reforms? This happened primarily because the euro zone’s tissue is woven from fibers that very much differ in strength and therefore falls apart at the seams.

The zone comprising allegedly equal partners has amalgamated countries absolutely unequal by their economic potentials and capacities. As a result, we see a sort of optical illusion, when economically weak partners rub elbows with economic giants and are living large, making more and more debts.

Luxembourg's Prime Minister Jean-Claude Juncker, the leader of the Eurogroup of finance ministers, rightly noted that for ten years the markets have shown to Greece the same confidence as to Germany. But the crisis put an end to the situation.

That is a strategic blunder of the leaders of the European Union, who unanimously voted at their summits in favor of bringing as much members as possible to the euro zone, while turning a blind eye to the fact that Greece, Portugal, Ireland, Cyprus, as the saying runs, are no match to German and French ‘economic muscles’. And now these members of a hastily assembled team lead to defeat of the euro zone and the EU as a whole.

Currently, reputable analytical institutions, rating agencies, prominent experts from around the world express their opinions on the future of the united Europe and the fate of the euro. The opinions, I must say, unequivocal in their essence. When one or possibly several states walk out of the euro zone it will result in a loss of confidence in that currency on a global scale and lead to the collapse of the zone itself.

In the long view, the current situation in Europe, indeed, may well lead to the disappearance of a common European currency. With all the positive sides of the euro and the convenience of its circulation in 17 countries of the continent, many Europeans are set now to return to the traditional national bank notes. Indicative of this fact are recent public opinion polls in Germany, which showed that more than half of respondents were in favor of abandonment of the euro and rebirth of the deutschemark.

This opinion in fact is shared by Sean Egan, the head of the U.S. Egan-Jones Ratings. Answering the question on whether the bankruptcy of Germany is possible, he said that it is quite real, and that Germany would have fewer problems if there was no common European currency.

The top officials of the countries which are in need of urgent help, as well as their counter partners in the potential lender states make various statements and promises to overcome the crisis and get out of the debt pits and financial deadlocks. But the light in the end of the tunnel is hardly visible. The situation requires multi-billion euro borrowings; while the treasuries of the wealthy partners are far from being bottomless and no-one can really work miracles.

The trouble is that the designs of the euro zone and the EU structure frame were ill considered resulting in faulty construction that could easily disintegrate into initial components.