Monday, September 26, 2011

Euro Mess - Simply Explained

Nobel Prize winning Economist, Paul Krugman, has a simple way of explaining things. I never understood the Euro mess until I read this:

The introduction of the euro in 1999 led to a vast boom in lending to Europe’s peripheral economies, because investors believed (wrongly) that the shared currency made Greek or Spanish debt just as safe as German debt. Contrary to what you often hear, this lending boom wasn’t mostly financing profligate government spending — Spain and Ireland actually ran budget surpluses on the eve of the crisis, and had low levels of debt. Instead, the inflows of money mainly fueled huge booms in private spending, especially on housing..

But when the lending boom abruptly ended, the result was both an economic and a fiscal crisis. Savage recessions drove down tax receipts, pushing budgets deep into the red; meanwhile, the cost of bank bailouts led to a sudden increase in public debt. And one result was a collapse of investor confidence in the peripheral nations’ bonds.

For the rest of his article explaining what will happen now, click here.


Generally, finance doesn't seem to have much soulful to it. Except that the root cause of this mess is a most human emotion: greed. The bankers who decided to lend too much money, were surely intelligent enough to know what they were doing. But greed blocked out their intelligence and morals.

Like in the US with the subprime mortgage mess, the bankers are not being penalized because they have too much clout.Instead, it is the much less wealthy - i.e. the general public, who has the most pain.

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