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If the Eurozone Collapses: What It Could Mean

Dec 14, 2011 Jennifer Williamson, Distance Columnist | 1 Comments

The Eurozone is a union of seventeen European countries (called member states) that have adopted the Euro as their common currency. Travelers are allowed free passage throughout member countries of the European Union without a passport, but governments remain autonomous. Member states include France, Germany, Italy, the Netherlands, Portugal, Spain, Austria, Belgium, Cyprus, Estonia, Finland, Luxembourg, Malta, Slovakia, and Slovenia.

The global economic crisis has not been kind to the European Union. Around late 2009, investors started to worry about a sovereign debt crisis in certain EU countries—starting with Greece. A sovereign debt crisis occurs when a country’s government fails or refuses to pay back its debt in full. These sovereign debt fears have driven up the cost of borrowing for countries including Greece, Ireland, Italy, Spain, and Portugal—with disastrous consequences.

Governments need to borrow to run their countries—and usually, sovereign governments are seen as stable investments and have access to low interest rates. Not so with these investor fears. Wealthy countries in the Eurozone, such as France and Germany, are now being called upon to bail out struggling countries. This is politically problematic for these countries’ leaders, who have to explain to their public why they should use their taxpayer dollars to bail out countries that don’t have their own finances in order. If these politicians can’t make the argument persuasively, they could be voted out of office for supporting the Eurozone.

If the union dissolves, it could dissolve in one of several ways, according to a report by the USB. One or more states could secede—a strong state or a weak state—or the entire union could break up entirely. There are a variety of negative consequences, depending on how the breakup occurs.

If a weak country leaves, that country risks a true sovereign default on its debts. This could lead to a collapse of the banking system, as more and more people panic and run to the banks to withdraw their money. Corporate defaults and a collapse in international trade could also follow. If a strong country leaves, it’s possible that its banks could be recapitalized, international trade could fall or collapse entirely, and corporate default could follow. A strong country’s secession could also have disastrous consequences for the union itself.

If the European Union were to break up, it’s also been predicted that Europe as a whole would lose its global influence. Riots, political upheaval, and public unrest would be very likely to occur as well. And the consequences for the US economy could be disastrous.

At first, the strength of the dollar could go up—because its major competitor, the Euro, has imploded. This could mean foreign investors rush to transfer their debts to US dollars, seen as a safer currency. This could make things in the US seem good for a while. But a stronger dollar means US exports are more expensive to the rest of the world—and fewer foreign customers will buy. It also means US workers will become much more expensive to pay than foreign workers—making even more incentive for US and foreign employers to hire overseas. This could lead to the employment situation in the US becoming worse in the long run. Exacerbating this problem is the fact that after a Eurozone collapse, the cheap workers Americans are competing with will be highly educated Europeans—not people of lower education levels from third-world countries.

US companies with large exposure to European debt would have problems, too. Companies that depend on European markets will see their own prices rise as the dollar grows stronger. Banks that lend to companies that depend on the European market could be in trouble too, if their borrowers have trouble paying back loans.

The US has little influence in the Eurozone’s policy discussions—so for now, the only thing we can do is watch and wait. However, there are many possible outcomes to the current crisis, and a collapse of the Eurozone is only one. The only thing that’s fairly sure is that if the Eurozone collapses, it won’t be good for the US economy.


Sksweeps Over a year ago

My parents are from Germany and I've watched the Euro and Eurozone from the beginning. Even then, I wondered how on earth it could possibly succeed and survive all the individual nation 'egos'! Strong and weak together, an incredible, fairly selfless committment was going to be required from the strong nations to help the weaker (financially speaking) nations thru crisis. They did ok for a while, but now the going is getting really tough and I don't know that the Euro is going to survive the economic and political (and nation/leader ego) challenges!

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