Reasons for the 2010 European Financial Crisis

Europe is the latest distressed flashpoint within the world economy. Investors fear contagion, or the possibility that economic collapse within one small corner of the globe will transition into international panic. Ironically, the makings of this latest financial crisis begin with Greece, which is hailed as a cradle for today's Western Civilization. I feel that ultimately, it will be the New World that rides to the rescue of the Old World, through the market mechanism. Although long-tem recovery is in order, painful reforms to the European business model may be necessary, in the interim.

Greece and the European Financial Crisis

In late April, years of fiscal mismanagement came to roost in Greece, as its interest rates spiked and financial markets crashed beneath the weight of debt default concerns. Apparently, Athens has been doling out popular, yet costly social programs to its citizens for years. During the past decade, large players within the financial community speculated that Greece actually was in fact, broken. Government officials, however, hired investment bankers to put together sophisticated transactions that masked expenses and minimized Greek's actual budget deficit. These actions signal that Greece was hell-bent upon meeting European Union guidelines, at all costs. The developments have called the viability of the entire European Union into question, as Greece slowly reorders its sovereign accounting standards back towards reality.

Greece and the European Union

Greece has exposed the contradictory European Union, whose name itself is an oxymoron. Today's fractured European Union is an attempt to promote economic solidarity amongst a collection of fiercely independent nations that have warred against each other for centuries. 27 Member nations rely upon the same euro currency as legal tender, while monetary policy is coordinated from the European Central Bank at Frankfurt. Monetary policy describes transactions that are designed to manage interest rates. Lower interest rates arrive in response to recession, and encourage institutions to borrow money to make investments and purchase goods. Conversely, monetary policy supports higher interest rates to slow down the economy, when inflation is a concern. Although the European Union imposes a uniform monetary policy, the collective has little authority to enforce the tax receipts and spending policies of its member nations.

Certainly, these conflicts will exacerbate chaos during hard times.

Today's battle lines are drawn by economics and the euro. Germany, and the fiscally conservative West, bristle at the notion of being forced to babysit and bailout their commercially weak neighbors that are perceived as irresponsible. Further, commentators have described a New Cold War that pits Germany, Great Britain, France, and Italy, against the former Iron Curtain strongholds of Poland, Slovakia, and Romania. These dynamics present interesting ramifications for the success of an economic bloc that rivals that of the United States, in terms of size.

The European Union and the United States

The euro has declined severely in value against the dollar towards a low of $1.20 per euro. These low exchange rates should translate into a boom for European travel and exports, as the Old World looks toward American pocketbooks for relief. The United States is now the strongest of the weak.

Reasons for the 2010 European Financial Crisis, Sources:

Bureau of Labor Statistics, U.S. Economy at a Glance

European Union, Basic Information

CIA, World Fact Book - Greece