Bloated Public Sectors Responsible for the Eurozone Crisis

Posted by PITHOCRATES - January 1st, 2012

Week in Review

The Eurozone was Europe’s answer to the United States of America.  One large, single-currency, free-trade zone.  And it worked.  For awhile.  During good economic times.  Like most things work during economic times.  Like it does in business.  A business could have a lot of cost problems and inefficiencies.  But if sales are good people don’t tend to see them.  Because healthy sales revenue can fix any problem.  It’s when you don’t have healthy sales revenue that high costs and inefficiencies hurt a business.  And the cost cutting, nay, the cost slashing begins.  Which is what has happened in the Eurozone.  Only they haven’t started the cost slashing yet (see The Eurozone Crisis For Dummies by Simone Foxman posted 12/30/2011 on Business Insider).

Since joining the euro back in 1999, the governments of Greece and Portugal (among other offenders) have gotten used to spending a LOT of money. When times were good, it wasn’t a problem — banks and other investors were willing to lend them money on the cheap and their public sectors became bloated.

When the financial crisis hit, however, problems came to a head. Debt levels in Portugal, Italy, and Greece became unsustainable, and taxes in a contracting economy are no longer enough to pay the bills.

Greece, Portugal, and Ireland are still struggling to bring their public debt under control, after receiving billions of euros in bailout aid from the European Commission, the International Monetary Fund, and the European Central Bank (the so-called troika). Some of this aid was provided through a temporary Special Purpose Vehicle called the European Financial Stability Facility (EFSF).

For a complete summary of the Eurozone crisis follow the above link to the full article.

Some say Europe’s spending is the problem.  Others say it’s the austerity they’re pushing onto the high-debt states that has taken a non-problem and created a crisis.  Some blame outside economic factors such as the American subprime mortgage crisis that ruined a good thing.  To point the finger of blame you need to look at when the crisis became a crisis.  And when was that?  When these countries could no longer pay the bills for their bloated public sectors.  Regardless of what caused it.  It happened.  And when it did they showed us that they could only support their government spending during exceptional economic times.  Which can mean but one thing.  They were spending too much.

When a business finds itself in this predicament the long knives come out and they start slashing costs.  And the businesses that weren’t spending too irresponsibly usually survive.  Those who spent too much or don’t slash enough don’t.  And that’s where the Eurozone is right now.  But they have a peculiar problem.  They may have a currency union but they are still independent nations.  Rich with history and tradition.  And set in their welfare-state ways.  These great social democracies of Europe.  The Eurozone as a whole can only hope the problem states do the right thing and cut back their spending.  Which they haven’t yet.  And appear to be doing only with the utmost reluctance.  Which explains the ongoing crisis.

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