A continent in the deep end

What's been going on in the eurozone while you've been on holiday? Take a look at Will Hodges' summer snapshots to find out

The background

How did the eurozone start?

The single European currency was introduced in January 1999, with physical notes and coins coming into circulation in January 2002. The original members were Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. In the years since then, more members have joined - Cyprus, Estonia, Greece, Malta, Slovakia and Slovenia.

Why was the eurozone set up?

It was hoped that a common currency would reduce trading costs, encourage intra-eurozone tourism, and integrate member states economically so that they could compete more effectively with major economic powers like the United States and rising emerging market nations such as China.

What are the terms of joining the eurozone?

Each original and subsequently joining member state must comply with some key terms, which were originally set out in the Maastricht Treaty. These include the following:

  • Any shortfall between national income and national spending (known as budget deficit) must stay at or below 3 per cent of the value of goods and services produced by the state (known as gross domestic product or GDP).
  • Government debt must be less than 60 per cent of GDP.

What's happening now?

Several member states - Ireland, Portugal, Italy, Spain, and particularly Greece - are facing massive budget deficits and the risk of economic collapse. Other eurozone nations are also suffering, both because of their connections to these states and also because of their own economic issues. The concerns surrounding the financial health of these countries have been felt by Europe's stock markets, which have suffered heavy losses in recent weeks as investors fear the return of recession across the region. Meanwhile, the value of government bonds for many affected states has fallen considerably, reflecting the growing risk of default.

What has caused these problems?

The biggest single cause of the eurozone's current problems is excessive government borrowing. The public debt, and other, conditions to eurozone membership set out in the Maastricht Treaty were intended to act as safeguards against this. However, the fact that very little action has been taken over breaches has allowed some states to become dangerously close to the national equivalent of bankruptcy. And because the eurozone nations in trouble have borrowed money extensively from banks right across the continent, their financial problems have implications well beyond their own national borders.

What action is being taken?

It was explicitly forbidden when the eurozone was established, but so far its members have given emergency cash to states in trouble on three occasions: Greece in May 2010, Ireland in November 2010 and Portugal in May this year. Meanwhile, eurozone members have also established a permanent bail-out fund, known as the European Financial Stability Facility (EFSF). This July, Greece was given a second lifeline and, in the same deal between eurozone members, it was agreed that the EFSF money would be more easily available to states in trouble. Many eurozone governments have also taken action themselves by implementing stern budget cuts, either under their own initiative or as a condition to financial assistance.


GDP: US$ 3,316,000 million

Public debt: 74.3 per cent of GDP

GDP growth forecast: 3.2 per cent****

Germany's economic stability makes it one of the most powerful members of the eurozone. Its success is mainly down to its large and globally-orientated export sector which has allowed it to profit from fast growth in emerging markets. Germany has a relatively high level of public debt, but its creditworthiness allows it to borrow money cheaply and easily. Germany's recovery from recession has been faster and more robust than expected, yet there are risks ahead for the country's economy. These include further slowdown in the economies of its major export partners, particularly the US, China and, of course, other European nations. Germany's economy also still has to contend with its under-performing former East German regions. And last but not least, the extent to which Germany will have to bear the brunt of the economic support the EU is providing to some of its less prudent members became obvious this summer.


GDP: US$ 1,410,000 million

Public debt: 64.5 per cent of GDP

GDP growth forecast: 0.8 per cent****

Like Italy, Spain has been one of the central characters in the eurozone debt crisis which shook the world's global financial markets during August. However, in some ways the country is in a better predicament than its peers, given that its debt-to-GDP ratio is relatively modest at around 60 per cent. However, in other respects, the state of the economy gives little room for enthusiasm. The general unemployment rate, which stands at over 20 per cent, is one of the highest in the Western world. The proportion of under-25s out of work, meanwhile, stands at an alarming 40 per cent. Stringent austerity measures are under way, though these have proved unpopular with an already hugely disgruntled populace. And Spain's government is currently planning to go even further by taking the rare step of amending the nation's constitution to set a legal limit to the debt the government can incur, though this move too has met with public opposition.


GDP: US$ 2,583,000 million

Public debt: 84.2 per cent of GDP

GDP growth forecast: 2.1 per cent

France sits somewhere in the middle of the eurozone in terms of economic stability. The country is considerably further from default than neighbours Italy and Spain, but France is also a long way from being considered as secure an investment haven as Germany. With public debt at over 80 per cent of GDP and the budget deficit high, the government has put in place a series of measures aimed at reducing these burdens. But going down this route has not been easy. France's heavily unionised workforce makes austerity programmes extremely difficult to push through. And this August, there were whispers of a possible downgrading of the French sovereign credit rating, thanks to Gallic exposure to Greek, Italian and Spanish economic woes. The rumours spooked the market as economic turbulence here would have a greater impact than that suffered by its southern European neighbours because of the greater size of the French market and the fact that French debt is held more widely in the global financial system.


GDP: US$ 204,000 million

Public debt: 93.6 per cent of GDP

GDP growth forecast: 0.5 per cent

Over the course of 2008 and 2009, the real estate bubble of the nation nicknamed "the Celtic Tiger" burst, taking with it Ireland's formerly flourishing financial sector and sending economic migrants and foreign benefactors packing. The government was forced to take on the massive debt accrued by the nation's banks, amounting to an estimated €106 billion - not far off Ireland's entire GDP. The Irish budget deficit (usually a surplus until 2007) peaked at 32 per cent in 2010 - an EU record. In November 2010, the Irish government announced the National Recovery plan, which they hope will put the country's finances back on an even keel. No sooner had the plan been revealed, however, than the government was forced to ask the EU for a €90 billion bailout package. But this July, things took a turn for the better for Ireland as the interest rate charged by the EU on this loan was reduced, reflecting a feeling that its economy may be stabilising, and meaning significant savings for its exchequer.


GDP: US$ 305,000 million

Public debt: 130.2 per cent of GDP

GDP growth forecast: -3 per cent

This Mediterranean nation now finds itself in the most precarious position of any eurozone member. Greece's government revealed in November 2009 that the previous administration had reported the nation's budget deficit to be a relatively manageable 5 per cent of GDP, but it was in fact closer to 13 per cent. Greece was then forced to beg for a €110 billion bailout, granted in May 2010, to avoid defaulting on its borrowings. The government has imposed savage spending cuts but these have been extremely unpopular and have led to extensive strikes and protests, making the task facing the government all the harder. This July, eurozone members agreed to establish a massive €109 billion fund to steady the Greek economy, but there are whispers that a third cash injection may be on the cards.


GDP: US$ 229, 000 million

Public debt: 83.1 per cent of GDP

GDP growth forecast: -1.5 per cent

Many fear that Portugal's recent bailout - a €78 billion emergency loan from the EU's coffers in May - will not be enough to save the small Iberian state from bankruptcy. The country's rescue package came subject to the condition that the government would undertake a series of measures to minimise public spending and get its finances on a sustainable path. Portugal is required to cut its deficit from 9.1 per cent of GDP in 2010, to 5.9 per cent in 2011, and to 3 per cent by 2013. New Prime Minister Pedro Passos Coelho, elected this June, is making efforts to implement the necessary economic changes, and in August EU inspectors reported that Portugal was on track to meet its 2011 goals. The nation still faces an uphill struggle to stay on track and to pay its many private creditors.


GDP: US$ 2,055, 000 million

Public debt: 118.4 per cent of GDP

GDP growth forecast: 1 per cent

Despite emerging from the global economic downturn apparently relatively unscathed compared to many of its peers, Italy has found itself at the centre of the eurozone crisis this summer. The country's near unparalleled level of public debt - almost 120 per cent of GDP - fuelled rising speculation that the country was on the brink of default, sending the value of the country's government bonds, and European stock markets, plummeting. In the end, Prime Minister Silvio Berlusconi was able to assuage investors' fears halting the slide for the time being at least, by moving swiftly to introduce a series of fiscal austerity measures aimed at reigning in the country's notoriously frivolous attitude to public spending. Will it be enough to put the Italian economy (and investors' confidence) back on track? Only time will tell.