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Surviving in the World: The Forever-Suffering Eurozone – Financial Crisis, Pandemic, and War 


Welcome back to Surviving in the World (SIW), your biweekly newsletter written by students, for students interested in global affairs. We always strive to present selected global news topics in an easy-to-understand format.

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In today’s letter, we cover the Eurozone and the many crises it has experienced, brought to you by Keonhee (Andrew) Ahn, SIW’s Editor in Chief.

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Word Count: 1058/ Time: 10 minute read

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​1. Recalling the Eurozone Crisis

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Demonstrators in Athens, April 2014, protesting against austerity policies imposed by Greece's foreign creditors. (Source: Photo by Yorgos Karahalis)

 

Recap: What was the Eurozone Crisis and what caused it?

  • The Eurozone Crisis in 2010 was a consequence of the 2008 Global Financial Crisis that first started with the bursting of the housing bubble in the US.

    • More specifically, the housing boom in America was fueled by subprime mortgage bonds (sketchy loans made to home-buyers with questionable credit scores).

    • When housing prices started to go down, a huge financial meltdown began because many investment banks and insurance companies were exposed to these subprime mortgages.

       

  • Although financial institutions in the Eurozone were not too heavily exposed to these subprime mortgages, the financial crisis led to the Eurozone Crisis because:

    • Banks around the world became risk-averse with the meltdown of the financial system

    • This meant that Eurozone countries like Greece and Spain that already had high debt-to-GDP ratios before the crisis had difficulty refinancing their government debt

    • This eventually led to the Eurozone Crisis, where many Eurozone countries could no longer borrow money or pay back creditors.

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Poster reads: “Why does the bank always win..? So I don’t feel like it.” (Source: Photo by Reuters)

 

Situational Awareness: When Greece and Spain could no longer pay back their debts, the “Troika” formed by the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) had to come rescue them.

  • Usually, you might imagine that a “rescue package” for a country in deep economic trouble with high unemployment rates would involve some sort of spending, with increased unemployment benefits and other stimulus to help revive the economy.

  • However, Troika’s rescue package centered on austerity, which increases taxes or decreases spendings to lower a country’s deficit because the target-countries had too much debt.

  • They were reluctant to use their money because they were worried about inflation.

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The Result: The rescue package didn’t accomplish much and the target-countries still haven’t reached their pre-crisis GDPs (chart below). Some critics blamed such failure on Troika’s obsession with austerity, while Troika itself blamed it on the supply side/structural issues that were external to the rescue package itself.

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GNI per capita, Atlas method (current US$) - Greece (Blue), Spain (Green), South Korea (Purple). (Source: The World Bank)​

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​The Bottom Line: Whatever the reason, Eurozone countries like Spain and Greece still have not fully recovered from the crisis, while the rest of the world (like Korea, Rep) has largely moved on.

 

2. Global Pandemic Ravages Eurozone Economy

​Situational Awareness: Eurozone countries like Spain and Greece that were hurt most during the Eurozone Crisis also happened to rely on tourism for a significant portion of its GDP. Due to pandemic, the two countries faced greater economic downturns with global tourist activity being wiped out.​

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Demonstrators in Athens, April 2014, protesting against austerity policies imposed by Greece's foreign creditors. (Source: Photo by Yorgos Karahalis)

 

Stark Statistics:

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  • In Spain, tourism accounted for 14.6% of its GDP in 2019, but this decreased to 5.5% in 2020. Meanwhile, its GDP decreased from $1.39 trillion to $1.28 trillion during the same period.

  • Similarly, 18.5% of Greece’s GDP was in tourism-related services in 2019 compared to only 7.8% in 2020. During this period, Greece’s GDP went from $205.3 billion to $189.4 billion.

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Shaky Recovery and War: It seemed as if tourism in the Eurozone countries was slowly recovering as with the creation of vaccines and herd immunity.

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  • Before the Ukrainian War, Reuters projected that Spain’s tourist sector was going to reach 88% of its pre-pandemic size in 2022, while similar projections have been made for Greece.

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The tourism industry, slowly recovering from the Covid-19 pandemic, is now facing upheaval from the impact of the Ukrainian war.



3. First War in Europe Since WWII

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Protesters in Boston call for a ban on Russian oil at a rally for Ukraine on Sunday. (Source: Photo by Joseph Prezios)

 

What’s happening?: After the U.S announced that it will no longer import Russian natural gas and oil, there has been pressure in Europe to halt its purchases as well. However, German Chancellor Olaf Scholz recently stated that the Eurozone will fall into a recession if it immediately stops importing Russian natural gas and oil.

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Why is this?

  • According to Scientific American, the E.U relies on Russia for 40% of its gas and 25% of its oil.

  • An embargo on Russian natural gas and oil will make prices soar, causing difficulties for European industries and citizens.

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Why you should care:

Although South Korea relies on Russian natural gas and oil for less than 5% of its imports, the intensifying tensions over the Ukrainian War has added to concerns about disruptions in global oil supplies. In fact, on March 8th, South Korea faced its highest gas price (US$1.55 per liter) in more than eight years.
 

One important quote:
 

On an immediate Russian energy ban, Olaf Scholz said:

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“To do that from one day to the next would mean plunging our country and the whole of Europe into a recession.”

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One Good Read: The Euro by Joseph Stiglitz

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What it is about: The Euro: How a Common Currency Threatens the Future of Europe portrays a pessimistic perspective on the Euro as a currency.

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  • Throughout the book, the author Joseph Stiglitz highlights the Eurozone’s flawed design, demonstrated by the fact that the 19 countries of the eurozone have been in an extended economic downturn for the past few years.

  • As mentioned above, Spain and Greece have been in long-term recessions.

  • He then outlines possible reforms to the Eurozone’s structure to prevent further crises.

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Who the author is: Joseph Stiglitz is an American economist and a Professor of Economics at Columbia University. His work focuses on explaining the circumstances in which markets function poorly and solutions that governments can implement.

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Photo of Joseph E. Stiglitz, in 2019. (Source: Photograph by Jérémy Barande)​

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You should read it because:

  • Stiglitz provides another perspective to the Euro, which is sometimes considered an ideal currency in Korea by diving into its flaws.

  • Korea has deep economic relations with several Eurozone countries. It is important, being international students, to understand the Eurozone since our future jobs may involve interactions with European industries.

  • Although the book focuses on the Euro, it also introduces us to the realm of economics. Stiglitz skillfully presents economic vocabulary and ideologies in a logical manner that is easy to understand for students.

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