Will the Eurozone Break Up?

Europe is no doubt in the age of austerity and as efforts are being made to lead the region back to recovery, an underlying drama continues to unfold threatening that progress. The eurozone in recent days has faced tremendous pressure as it tries to deal with the Irish crisis fanning rumors that the 16-nation common currency bloc will break up in the foreseeable future.

Just a few months ago, European Union (EU) leaders set up a $1 trillion emergency fund after they were forced to bail out Greece back in May. Now that the Republic of Ireland has demanded to tap into that loan facility, many argue that core members of the EU such as Germany are starting to have doubts whether their experiment of a genuine European single currency is actually working.

Defenders of the euro of course will immediately strike down such claims even as international markets have become increasingly nervous with the possibility that Portugal and Spain will follow suit as countries lining up for aid from the European Financial Stability Facility (EFSF).

German leaders and taxpayers are beginning to be impatient and have lately been tough against weaker members of the eurozone saying they need to clean up their house and warned that the euro was in seriously bad shape. This has irked some members of the European Central Bank stating Germany should tone down their alarmist stance and try to look beyond the surface and understand the deeper root causes of the problem within individual states.

Competitive imbalances are often blamed for the problems in the region. Germany for example enjoys a trade surplus compared to Portugal which has a forecasted current account deficit of 8 percent of gross domestic product (GDP) in 2012.  Bond yields in Spain and Portugal are now at record highs diminishing their respective governments’ ability to pay off their debts without external aid.

Economists are hoping that both countries will survive the crisis and prevent another Greek- and Irish-style meltdown. However, if they do indeed fall in the same hole, questions will definitely mount whether there are more countries to follow and how long will the richer countries in the eurozone bear the burden.

Although the idea seemed inconceivable just a few weeks ago, the eurozone may soon see itself without Germany who will reintroduce the deutche mark or the eurozone may get rid itself of weaker members in order to have a more homogenous and more equal membership. SE6Q68XBG4YA

The Irish bailout explained

Economies all over the world have set their eyes on Ireland over the course of the week. For many, the decision that will be made by the European Union (EU) and multinational lending agencies will determine whether Europe’s “road to recovery” will continue or will face a standstill. Many ordinary citizens are now asking what really happened over there.

Ireland is one of the eurozone’s economic darlings in the past decade and for most part of this century. Economic growth was generally high from 1995 to 2007. When the global economic crisis erupted in 2008, the Irish economy contracted significantly and unemployment rose sharply.

Irish banks likewise suffered as in the case of other states in Europe during the crisis. The Irish central bank has been pumping cash into these banks to keep them afloat which in turn shore up the country’s public deficit.

The EU and the International Monetary Fund (IMF), aware that this condition if allowed to continue could potentially be perilous not only for Ireland but for other economies in the eurozone facing similar problems, offered to step in during these past few days. An emergency loan facility for Ireland amounting to an estimated 100 billion euros is expected to be announced any time soon.    

As expected, there are pros and cons for the bailout. Some analysts maintain that an “early” bailout could avoid further complications for Ireland and could stabilize countries like Spain and Portugal, which are also having debt problems of their own.

Skeptics of the plan, meanwhile, believe that Ireland will be left with no choice but to follow IMF-dictated austerity and revenue generating measures including increasing their generous corporate tax rates, one of the most competitive in Europe, in order to contain their ballooning fiscal deficit which is now expected to stand at a third of the gross domestic output after the bailout.

Markets in Europe, North America, and Asia are keenly anticipating how the drama will unfold. Since word has gone out that a bailout package is in the works, it has somehow assuaged the fears of many that the global economic recovery will take a little while more rather than sooner.