Europe at the Brink – A WSJ Documentary

The Wall Street Journal recently published a documentary about the origin of debt crisis in Europe, citing imperfect union as the root cause. After World War II, economic ties were sought to prevent future conflicts. 1957 Treaty of Rome established European Economic Community. In the next decades, the idea of a unifying currency was sought, finally leading to the rise use of euro today. People hoped that this would be the start of a united Europe. However, while there was monetary union, there lacked fiscal union. All countries shared same policies regarding the supply and value of euro, but each country differed in its growth and governmental policies, helping to plants the seeds of current situation. Due to low borrowing costs, counties like Greece took on debt to offset its own weak internal growth.

In October 2009, Greek debt projected to be 3% of its GDP was actually 12%. Foreign investors panicked, and costs of borrowing to Greece increased. Given the abundance of countries and governments in the euro-zone, actions were slow to be implemented. In May 2010, Greece needed a bailout for its debt, but anxiety about Greek fiscal soundness continued. Furthermore, the worry began to spread through the continent. Particularly distressing was Italy, the euro-zone’s third largest economy.

The question looms whether to form a tighter fiscal union or let the countries dissolve further apart. The premise of the euro was for the countries to converge their economies, but such has not been observed. What direction Europe would go also remains a mystery; some even speculate one or more members leaving the zone this year. Disciplined approach to national finance is now crucial. The stake of the entire world economy is contingent on the approaches Europeans take.

Source:

• http://blogs.wsj.com/dealjournalindia/2012/01/04/europe-at-the-brink-%E2%80%93-a-wsj-documentary/