The new président of the European Central Bank (ECB), Mario Draghi, governor of the Bank of Italy, is not due to take up office until 1st November 2011. In the meantime, Jean-Claude Trichet, the outgoing president, has the unenviable task of guiding the euro nations through the worst financial crisis they have had to face since the adoption of the Euro as a common currency by eleven of the European Union (EU) member states on 1st January 1999.
Today, 17 of the 27 EU countries have adopted the euro. They constitute what is called the euro zone. A number of other countries, non-members of the EU, mainly micro-states such as the Vatican City, Monaco, San Marino and a few overseas territories such as Mayotte, Saint Barthélemy and Saint Martin, have also adopted it as their national currency. It is used daily by an estimated total of 330 million people, just under 5% of the world population.
Another 23 countries have pegged their national currencies directly to the euro, mainly on the African continent. The euro is the second most widely held reserve currency after the U.S. dollar. Itrepresents roughly 22% of currency reserves of the major economies and 33% of reserves ofdeveloping economies.
The euro is now eleven years old and, by and large, has lived up to expectations. The coming months are going to be crucial as it braces itself to weather the storm of the worst sovereign debt crisis Europe has had to face since the Great Depression of the 1930s and the two World Wars. The current crisis was triggered when the sub-prime (poor quality loans) real estate bubble burst in the US in 2007. This had devastating effects not only in the US but also on all major European banks and financial institutions.
Governments came to the rescue of their banks by borrowing money on the international financial markets, creating a mountain of sovereign debt in the process. Some euro zone countries are now having difficulty honouring their debts.
While irresponsible house loans to people in the US, who had no means of paying them back, is what originally triggered the financial crisis, it was irresponsible management in Europe by successive governments of their country's national finances that made their economies unduly vulnerable.
None of the euro zone countries are free from criticism in this respect, apart from Germany, the only truly virtuous economy that underpins the euro. Ever since the disastrous economic conditions and galloping inflation that paved the way for the rise of Hitler and the third Reich prior to World War II, the Germans have developed a visceral attachment to strong currency. This is a principle that suffers little or no flexibility so far as they are concerned.
An increasing number of euro zone countries are nevertheless plunging deeper and deeper in debt due to high interest rates, low economic growth, high unemployment and aging populations. Debt is growing faster than the available fiscal income to repay it. Populations are already having difficulty making ends meet and their governments are imposing even tougher austerity measures on them.
There are already manifestations of social unrest in a number of countries. People reject the austerity measures that are unjustly being imposed on them, throwing the blame on their successive governments and opposing any recourse to international authorities such as the EU or the International Monetary Fund (IMF) for aid. They categorically refuse to accept the idea that they are no longer in sole charge of their country's financial affairs.
All eyes are turned towards Greece at the moment. The EU and the IMF provided a life line of € 110 billion a year ago to avoid the country from becoming insolvent and have just promised an additional € 120 billion provided the government implements additional austerity measures. Throwing more money at the problem will gain time but few consider it will solve the problem. It is almost certain the additional austerity measures will act like oil on the raging blaze of social revolt.
It is not difficult to imagine that the flame of revolt may also spread to other euro zone countries experiencing similar difficulties to varying degrees. This includes countries like Italy, Spain, Portugal, Ireland and Belgium. Even France is carrying a heavy load of sovereign debt.
Greece has already had wage cuts, pension cuts, national budget cuts and tax increases. It is now obliged to embark on a massive privatisation campaign to sell off state held properties and public services. According to the new austerity measures the government will have to dispose of one large state-controlled company every ten days.
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