February 9, 2015

This coming week will be critical for Greece and its debt crisis. Last week, the European Central Bank (ECB), the central bank for the 19 member countries of the European Union (EU) that have adopted the euro as their currency, refused to consider restructuring the national debt of Greece.

Alexis Tsipras, leader of the anti-austerity party Syriza, was chosen as prime minister of Greece after parliamentary  elections there on Jan. 25, 2015. Credit: AP Photo

The new finance minister of Greece, Yanis Varoufakis, traveled to Berlin last week to discuss his nation’s financial difficulties. The funding that was granted to Greece by the ECB five years ago in a bailout of Greek banks is about to come due, and Greece needs to refinance that sum. Varoufakis was hoping the ECB would continue normal funding of Greece for the next several months, allowing the newly elected government of Greece time to renegotiate a lower rate of debt with its creditors.

The ECB wants Greece to refinance the full amount owed to the ECB for another term. The Greek prime minister, Alexis Tsipras, and his party, Syriza, were elected on a platform of anti-austerity and debt reduction, however, by an electorate thoroughly disenchanted with EU policy on debt. Tsipras believes he must negotiate a reduction in the amount of debt refinanced for the good of the Greek people and his party’s political credibility.

Greek debt has been a thorny issue for the EU for some time. During the boom economic times of the 2000′s until the end of 2007, Greek banks sold more bonds (debt) than was financially responsible. With the economic meltdown and the global Great Recession that began in 2008, weakness in the Greek economy led investors to find such bonds less attractive. Greek banks had far too little capital (money on hand) to weather the change. By 2010, the crisis of confidence in Greek debt was so severe that the nation had no access for financing its debt—that is, no one wanted to buy bonds to finance the government of Greece or its banks.  The EU, through a group known as the “troika”—the ECB, the European Commission, and the International Monetary Fund (IMF)—eventually loaned Greece some 300 billion euros ($340 billion).

With the bailout, the European Union imposed a series of austerity measures on Greece. These measures included cuts to social spending, pensions, and minimum wages, and increases to personal income taxes. Such austerity measures are intended to reduce a nation’s indebtedness. However, during a recession, a government often needs to increase spending to stimulate growth in its economy. In 2010, Greece was entering a recession (which it has only recently left). During this recession, Greek debt increased. In 2009, the ratio of debt to gross domestic product (GDP—the market value of all final goods and services produced in a country during a given period) in Greece was 130 percent. In 2015, the ratio had increased to 170 percent. Greece is somewhat trapped. Government money used to increase jobs—unemployment in Greece is at 27 percent—might lead to economic growth and increased tax revenue, but such spending is barred under the terms of the loans from the EU. Furthermore, as its tax revenues decrease with fewer workers earning lower wages, Greece has less money to pay the debt it has incurred.

Other World Book articles:

• Crisis in the Eurozone (a Special report)
• Eurozone Crisis: No End In Sight (a Special Report)

October 30, 2013

Spain’s gross domestic product (GDP) grew by 0.1 percent in the three-month period from July through September, the Spanish National Statistics Institute reported today. The third-quarter economic growth ended a two-year recession. Spain’s economy had contracted for the previous nine quarters. Spain—with Greece, Ireland, Italy, and Portugal—was one of the countries hit worst by the recent debt crisis in the eurozone. (The eurozone consists of the 17 European Union member nations that adopted a single currency, the euro). According to the Institute report, Spain’s third quarter economic growth was driven by an increase in exports and a boost to tourism from vacationers avoiding the ongoing upheavals in North Africa and the Middle East.

The euro has replaced the individual currencies of the eurozone—made up of 17 member nations of the European Union. The eurozone has finally begun to climb out of a lengthy recession (European Central Bank).

Spain’s economy was hard hit when a decade-long property bubble burst with the worldwide crash of 2008. The country’s banks, sitting on hundreds of billions of euros in bad property loans, only survived with government bailouts. Thousands of businesses went under, and the country’s rate of unemployment soared to 26 percent. The rate of unemployment among people under the age of 25 spiked to more than 50 percent. High unemployment combined with a government austerity program consisting of spending cuts and tax hikes triggered huge public protests.

Many economists now suggest that the eurozone debt crisis appears to be easing. They point out that Ireland emerged from recession in the second quarter of 2013, helped by a rebound in exports and a rise in consumer spending. Portugal pulled out of two and a half years of deep recession with economic growth of 1.1 percent in the second quarter of this year, surpassing expectations. Economists believe that Greece’s record six-year recession is bottoming out, with the economy set to shrink this year by significantly less than analysts had forecast in June. Italy remains in recession, but the Economics Ministry reported yesterday that economic indicators suggest that a predicted recovery next year will likely be stronger than expected.

Additional World Book articles:

• Crisis in the Eurozone (a special report)
• Economics Crisis: The Banking Meltdown (a special report)
• European Union: The Euro (a special report)
• Eurozone Crisis: No End in Sight (a special report)

May 7, 2012

Francois Hollande has won the second round of France’s May 6 presidential election. Hollande took just under 52 percent of the vote, compared with President Nicolas Sarkozy’s 48.3 percent. Sarkozy, who campaigned on a promise to reduce France’s large budget deficit, is the first president not to win a second term since Valery Giscard d’Estaing in 1981.

Francois Hollande promised to refocus the response to the eurozone debt crisis on growth and jobs rather than austerity. Austerity in some eurozone countries has involved severe budget cuts, including the elimination of many public jobs, reductions in pensions, and increases in personal taxes. Hollande instead has pledged to raise taxes on big corporations and on people earning more than 1 million euros ($1.4 million) a year. He has also proposed to raise the minimum wage, hire more teachers, and lower the retirement age from 62 to 60 for some workers. Hollande is France’s first socialist president since Francois Mitterrand, who held office between 1981 and 1995.

In parliamentary elections in Greece, also on May 6, voters turned away from the two dominant political parties, instead voting in protest for the far left and neo-Nazi right. The elections were the first public test of the European Union (EU) bailout of Greece’s national debt and the subsequent austerity program that Greece was forced to adopt. Analysts noted that the outcome was clear–a complete rejection of that agreement.

Member nations of the European Union (EU).

The euro is used by 17 member nations of the European Union. European Central Bank

While Mr. Hollande has said that he intends to give “a new direction to Europe”–specifically  instituting measures to stimulate economic growth–German Chancellor Angela Merkel made plain today that she was not open to renegotiating Europe’s current program of austerity. “I may say from my side that Francois Hollande will be welcomed with open arms here in Germany by me,” stated the chancellor at a press conference in Berlin. “We will work together well and intensively.”  However, Merkel insisted that the fiscal pact she negotiated with President  Sarkozy and endorsed by 25 EU member nations is “not negotiable.”

Additional World Book articles:

• Crisis in the Eurozone (a special report)
• Economics 2011 (Back in Time article)
• France 1958 (Back in Time article)
• France 2011 (Back in Time article)
• Greece 2009 (Back in Time article)
• Greece 2010 (Back in Time article)
• Greece 2011 (Back in Time article)

April 23, 2012

Socialist Francois Hollande received the most votes in France’s presidential election on April 22, forcing a second-round run-off on May 6. Hollande took 28.5 percent of the vote, compared with President Nicolas Sarkozy’s 27.1 percent. Far-right candidate Marine Le Pen won 18.2 percent of the vote, with the rest divided among seven other candidates. French political experts described Le Pen’s vote as “a stunning result for the far right.” (They regard her National Front party as anti-establishment, anti-European Union (EU), and anti-immigrant; critics accuse the party of inciting Islamophobia.) The election was the first in which a French president running for re-election failed to win the first round since the start of the Fifth Republic in 1958.

President Sarkozy campaigned on a promise to reduce France’s large budget deficit and to tax people who leave the country for tax reasons. He has also threatened to pull out of the EU passport-free zone unless other member countries do more to curb immigration from non-European countries. If Sarkozy loses the run-off, he will become the first president not to win a second term since Valery Giscard d’Estaing in 1981.

Nicolas Sarkozy (© Thibault Camus, AFP/Getty Images)

Francois Hollande wishes to refocus the response to the eurozone debt crisis on growth and jobs rather than austerity. He has promised to raise taxes on big corporations and on people earning more than 1 million euros ($1.4 million) a year. He also proposes to raise the minimum wage, hire more teachers, and lower the retirement age from 62 to 60 for some workers. If elected, Hollande would be France’s first left wing president since Francois Mitterrand, who held office between 1981 and 1995.

Additional World Book articles:

• De Gaul, Charles
• Left wing
• Right wing
• Crisis in the Eurozone (a special report)
• Economics 2011 (Back in Time article)
• France 1958 (Back in Time article)
• France 2011 (Back in Time article)

Feb. 21, 2012

Leaders of European Union (EU) nations, meeting in Brussels, have agreed to a 130-billion-euro ($170-billion) bailout of Greece and a write-down of its national debt by at least 107 billion euros ($145.5 billion). The deal is intended to save Greece from defaulting (failing to pay debts when due). Greece’s national debt currently stands at 160 percent of gross domestic product (GDP). GDP is the market value of all goods and services produced in a country in a given year.

The debt write-down involves private bondholders–primarily banks and other financial institutions–taking losses of as much as 70 percent. They will exchange their current holdings for new Greek bonds of a lower value: 30-year bonds with an interest rate of about 3.75 percent. The incentive behind the bondholders’ acceptance of the write-down is simple–30 percent of value is better than nothing at all.

Coins and bills of the euro, the common European currency, went into circulation on Jan. 1, 2002. The euro has replaced the individual currencies of 17 member nations of the European Union. European Central Bank

In exchange for the loan and write-down, Greece faces yet more austerity measures (strict rationing to conserve resources): steep public-sector wage cuts; the layoff of some 150,000 public employees by 2015; a 20-percent decrease in the minimum wage; and a slashed defense budget. The measures are intended to reduce Greece’s debt to 120.5 percent of GDP by 2020.

In what is seen as a humiliating and unprecedented intrusion into Greece’s sovereignty, permanent monitors from the EU, the European Central Bank, and the International Monetary Fund are to take up residence in Athens to ensure Greek compliance. Greece must also amend its constitution to give priority to repaying the bailout loan over the funding of all government services.

Additional World Book articles

• Crisis in the Eurozone (a special report)
• Europe 2010 (Back in Time article)
• Greece 2010 (Back in Time article)

Nov. 13, 2011

Mario Monti, a highly respected economist and a former European Union (EU) commissioner, has been nominated to become Italy’s prime minister and form a new government to tackle the acute national debt crisis. (National debt is the total amount that a federal government owes because of money it has borrowed by selling bonds or other securities.) Italy’s former prime minister, Silvio Berlusconi, formally resigned on November 12 after a new austerity package (strict economic measures) were passed by both houses of parliament. The austerity package includes a mixture of tax increases and spending cuts with the aim of saving 59.8 billion euros ($89.6 billion) to balance the budget by 2014. On November 9, the yield, or rate of interest, on 10-year Italian government bonds shot above 7 percent. (A bond is a certificate issued by a government promising to pay back money it has borrowed). Higher-risk bonds must pay a higher interest rate to attract buyers. When the interest rate on the government bonds of Greece and Ireland in 2010 and Portugal in 2011 climbed to 7 percent, the three countries were forced to seek bailouts from the European Union to avoid bankruptcy (the state of being legally unable to pay debts).

The euro has replaced the individual currencies of 17 member nations of the European Union, including Italy and Greece. European Central Bank

On November 10, Greek political leaders named Lucas Papademos as prime minister. Papademos, also a respected economist, is a former vice president of the European Central Bank. The coalition (multiparty) government he will lead has pledged to save Greece from bankruptcy by quickly approving the tough terms of the second bailout package that was approved by European Union leaders on October 26.

Additional World Book articles:

• Economics
• Crisis in the Eurozone (a special report)