Simple explanation to why Europe is having financial problems.

Why is Europe having such financial problems?

I travel to Europe often. I have just started another European experience in Barcelona, Spain. In Europe, many countries are experiencing troubles due to excessive sovereign debt. In particular, there are problems in Portugal, Ireland, Italy, Greece, and Spain (the “PIIGS”), with Greece and Spain particularly noteworthy cases.

 

What is the Source of the Problems?

The standard explanation for the problems in some of the countries, e.g. Greece, is that lack of effective monitoring of government deficits within euro area countries and lack of enforcement of the rules on how much debt a country can have allowed excessive debt levels to accumulate. In other cases such as Spain, the problem wasn’t irresponsible budget behaviour; it was the recession that caused the government budget to collapse. Thus, the problems were generated both by bad behaviour and by bad luck, and once these countries got into trouble, the deficit problems were made worse by the fact that countries within the euro area do not have the ability to use independent monetary policy. If these countries had their own currency, they could devalue and stimulate exports and this would offset the negative effects from raising taxes or cutting spending to address the deficit problem, but that option is not available.

What are the Possible Solutions?

There are two problems to address, how to prevent debt problems from happening in the first place, and what to do if problems develop despite attempts to prevent them. A key factor here is the ability to measure debt loads accurately. Accounting tricks such as those used by Greece to hide its growing indebtedness should not be allowed. Thus, in addition to the need for penalties when countries are out of compliance, the reporting rules need to be strengthened so that compliance can be accurately assessed. I have seen no attempts to reduce spending, Saying that I am in areas that see a lot of people. But in booking this trip I did not see any ‘reduced’ prices for accommodations and food. Maybe these countries need to look at other areas to stimulate their economy instead of looking for the government for relief.

Travel Safe,

Karen

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9 Responses to Simple explanation to why Europe is having financial problems.

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