Financial Crisis in Peripheral Europe Term Paper

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In other words, there are few controls in place to ensure responsible spending or, in the case of Greece, that the books are not cooked. The implication of this is that Greece makes errors and commits fraud, knowing that the eurozone will be forced to bail them out or risk grave instability. The other nations are then forced to bail Greece out, because they share a common currency and therefore a common economic fate, but also because the Germans benefited from the high current account balance in the first place.

There are a number of potential solutions. The eurozone could determine that addition by subtraction is a good strategy. Despite the short-term instability, it would allow the zone to be comprised of major exporting and otherwise fiscally responsible nations. Throwing the PIGS under the bus may be difficult politically and cause severe harm in the short-run, but could benefit the eurozone in the long run, particularly those countries that will otherwise be condemned to endless bailouts.

The second potential solution is to improve oversight. The warning signs of the crisis were there -- current account balances for countries like Spain plummeted in the wake of the housing bubble for example. The crisis is so intense because few safeguards were put in place -- an eventuality of this magnitude was not predicted. Now that we know how bad the damage can be, strong oversight is required, not just to ensure that current account deficits remain under control, but also with regards to basic governance. Greece's problems stem essentially from fraud, which with strong oversight on the part of the wealthy nations could have been avoided.

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Another potential solution would address the problem at the systemic level. Germany is a massive exporter to other European countries, which causes the imbalance in European trade. This is caused by a number of factors, but a major one is the underlying differences in competitiveness between different member states. A solution, therefore, would be a tighter political union -- a common budget, common governance, common taxes -- in order to redistribute resources in a non-crisis situation (Fleming & Shipman, 2010). Such a solution would allow for a greater distribution of resources, which is being achieved currently through bailouts and would have been achieved previously by increasing interest rates and devaluing the currency of the weak partner. This potential solution, therefore, is political untenable. It would also create a disincentive to work for many Europeans, crippling the region's economy and further depressing the currency.

Overall, the best solution may be to cut loose the weaker members of the euro. The zone is not strong enough with the PIGS in, and the result is likely to be successive crises and bailouts that strain Europe's wealthiest countries while acting as little more than a stop-gap for the poorer ones. Ultimately, if these countries are unable to become more competitive, or unwilling to be more fiscally responsible, the entire euro could collapse. It is better to absorb the shock now of removing some weak countries and built a strong euro for long-term growth without the PIGS.

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