The goal of the conference “is to try to go back to basics and try to figure out what everybody [means when they are] talking about [the] crisis, what is it a crisis of- when we talk about a crisis what do we have in mind?”

-Antony Molho

Terminology

Public debt- the debt that countries have

European Central Bank (ECB) - the central bank for the Eurozone located in Frankfurt, Germany, created in the aftermath of WWII.  Made up of an Executive Board, Governing Council, and General Council

The Federal Reserve- also known as the Fed, the central bank of the United States. 

PIGS- Portugal, Ireland, Greece, and Spain

PIIGS- Portugal, Italy, Ireland, Greece, and Spain

The Eurozone- the economic and monetary union of the 17 countries that use the euro as their currency

Devaluation- A deliberate downward adjustment of a country´s official exchange rate relative to other currencies.

Productivity- the amount of output per unit of input, higher productivity means producing more efficiently

Service the debt- pay the interest payments that have accumulated

People to know

Mario Monti- Prime Minister of Italy

Angela Merkel- German Chancellor

Nicolas Sarkozy- President of France

Lucas Papademos- Prime Minister of Greece

Mariano Rajoy- Prime Minister of Spain

Mario Draghi- President of the European Central Bank

Ben Bernanke- chairman of the board of directors of the Federal Reserve

The Euro

The Euro created a monetary union, known as the Eurozone, which transferred monetary decisions away from individual countries and consolidated them into one central banking system, called the European Central Bank. The Euro created a unified monetary policy; however, fiscal policy is still determined by each individual country.  The Euro originally included twelve countries, but has since expanded to seventeen.

How the Euro has affected members of the Eurozone’s economies

Prior to the creation of the Euro, if a country was unable to raise sufficient amount of money to cover its debts, it had the ability to devalue its currency.  This action increased tourism and caused their products to become cheaper abroad, resulting in increased exports.  Governments used devaluating their currency as a tool to increase the competitiveness of their products. The creation of the Euro removed this tool from the power of governments, leaving increased productivity as the only way to increase exports.  This is the method that was adopted by Germany, and other countries, which began in the 1990s. 

What is going on with the PIIGS

Since about 1980s, Spain, Greece, Portugal, Ireland, and Italy, have been spending more than they can receive in taxes, which has caused them to borrow.  This has resulted in an enormous increase in the funded public debt.  Once the Lehman Brothers failed in the United States, banks became much more careful about lending; they felt these countries had become too risky to invest in and wanted higher interest payments.  Higher interest payments meant that the debt servicing charges of these countries became very high.  To finance these carrying charges they had to increase taxes, which often means the economic activity of a country will slow down, because investments tend to decrease.  Other aspects also complicated matters, such as corruption, and heavy bureaucracy.  Soon, some countries became unable to service their debt, and this is where the crisis came to a head.

The Problem in Greece

Simply, Greece has a very large public debt; it was not able to service its debt and in order to do so it would have to borrow more.  However, no one was willing to take the risk.  The Eurozone created a bailout package with very strict terms that required Greece to greatly reduce its deficit.  This past March the Eurozone signed a second bailout for the still struggling country.