Regional Article 2: What really caused the eurozone crisis? BBC News Dec 22, 2011

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As you read the article. notice how many times we broke the laws of dynamic complexity.  These laws govern the nature of dynamic (recurrent problems) complexity.

I see three laws here.  They are laws 8, 6 and 4.   I have listed the laws against the text of the article below and the explanations at the end of the texts.

There are more.

Show us what you see.

“What really caused the euro zone crisis? Dec 22. 2011 BBC News”

World leaders probably spent more time worrying about the euro zone crisis than anything else in 2011.

And that was in the year that featured the Arab Spring, the Japanese tsunami and the death of Osama Bin Laden. What’s more, 2012 looks set to be not much different. But as euro zone governments hammer out new rules to limit their borrowing, are they missing the point of the crisis?

Follow the path to find out.

Continue reading the main story

The euro zone has agreed a new “fiscal compact”

  • Euro zone leaders have agreed to a tough set of rules – insisted on by Germany – that will limit their governments’ borrowing each year to just 3% of their economies’ output. This is to stop them accumulating too much debt, and make sure we avoid we another financial crisis.

But didn’t they already agree to this back in the ’90s?

  • Hang on a minute. They agreed to exactly the same 3% borrowing limit back in 1997, when the euro was being set up.  It was the  German finance minister Theo Waigel who insisted on the “stability and growth pact”. What happened?

So who kept to the rules?

  • Italy was the worst offender. It regularly broke the 3% annual borrowing limit.  But actually Germany – along with Italy – was the first big country to break the 3% rule. After that, France followed. Of the big economies, only Spain kept its nose clear until the 2008 financial crisis; the Madrid government stayed within the 3% limit every year from the euro’s creation in 1999 until 2007. Not only that – of the four, Spain’s government also has the smallest debts to the size of its economy. Greece, by the way, is in a class of its own. It never stuck to the 3% target, but manipulated its borrowing statistics to look good, which allowed it to get into the euro in the first place.  Its waywardness was uncovered two years ago.
  • 3/9 Italy
    Worst offender
  • 5/9 Germany
    First to break rules
  • 6/9 France
  • 9/9 Spain
    Top of the Class

But the markets have other ideas

  • So surely Germany, France and Italy should be in trouble with all that reckless borrowing, while Spain should be reaping the rewards of its virtue? Well, no.  Actually Germany is the “safe haven” – markets have been willing to lend to it at historically low interest rates since the crisis began.  Spain on the other hand is seen by markets as almost as risky as Italy.
  • So what gives?

So what really caused the crisis?

  • There was a big build-up of debts in Spain and Italy before 2008, but it had nothing to do with governments. Instead it was the private sector – companies and mortgage borrowers [@1  LAW #8] – who were taking out loans [@2 LAW #4. Interest rates had fallen to unprecedented lows in southern European countries when they joined the euro. And that encouraged a debt-fuelled boom.
  • Good news for Germany…
  • All that debt helped finance more and more imports by Spain, Italy and even France. Meanwhile, Germany became an export power-house after the euro zone was set up in 1999, selling far more to the rest of the world (including southern Europeans) than it was buying as imports. That meant Germany was earning a lot of surplus cash on its exports. And guess what – most of that cash ended up being lent to southern Europe.
  • …bad news for southern Europe
  • But debts are only part of the problem in Italy and Spain. During the boom years, wages rose and rose in the south (and in France). But German unions agreed to hold their wages (and their personal spending) steady. So Italian and Spanish workers now face a huge competitive price disadvantage. Indeed, this loss of competitiveness  [@3 LAW #3 is the main reason southern Europeans have found it so much harder to export than Germany.
  • …and a nasty dilemma
  • So to recap, government borrowing – which has ballooned since the 2008 global financial crisis – had very little to do with creating the current euro zone crisis in the first place, especially in Spain (Greece’s government is the big exception here). So even if governments don’t break the borrowing rules this time, that won’t necessarily stop a similar crisis from happening all over again.
  • Spain and Italy are now facing nasty recessions, because no-one wants to spend. Companies and mortgage borrowers are too busy repaying their debts to spend more.  Exports are uncompetitive.  And now governments – whose borrowing has exploded since the 2008 financial crisis savaged their economies – have agreed to drastically cut their spending back as well [@4 What Law is that?].  But…

Cut spending…

  • …and you are pretty sure to deepen the recession. That probably means even more unemployment (already over 20% in Spain), which may push wages down to more competitive levels – though history suggests this is very hard to do. Even so, lower wages will just make people’s debts even harder to repay, meaning they are likely to cut their own spending even more, or stop repaying their debts. And lower wages may not even lead to a quick rise in exports, if all of your European export markets are in recession too. In any case, you can probably expect more strikes and protests, and more nervousness in financial markets about whether you really will stay in the euro.

Don’t cut spending…

  • …and you risk a financial collapse. The amount you borrow each year has exploded since 2008 due to economic stagnation and high unemployment. But your economy looks to be chronically uncompetitive within the euro. So markets are liable to lose confidence in you – they may fear your economy is simply too weak to support your ballooning debt load. Meanwhile, other European governments may not have enough money to bail you out, and the European Central Bank says its mandate doesn’t allow it to. And if they won’t lend to you, why would anyone else?

@1    When we state country, the one that comes to mind (obviously), it is the government (and therefore) the public servants are spending (the Ministers must be corrupt , etc.).  But the areas of the highest leverage, the citizen, the family, the industries stayed hidden behind the ‘name of the country’.  Law #8 says, the areas of the highest leverage are often the least obvious.  We need to be understanding this about ourselves and use it to turn the situation around.

@2   Taking loans out, which is borrowing money and spending money we do not have, is easier than freezing wages (and choosing not to spend the money).  Notice what we are avoiding.  We usually do not watch what we are avoiding.  We need to be watching both should we expect to turn a situation around.

@3  Loss of competitiveness shows how things have got worse after some time of seeing things become easier or better.  This indicates that the two (when things got worse and the things that got better) are interconnected.  As we appreciate the interrelatedness of these issues, we now begin to have a handle on the situation.

@4  What law is broken here?  Why do you say that?  Do explore the reasonings with each other.