Silvio Berlusconi by European Peoples Party

The financial crisis in Europe has put the Euro in serious danger. While the situation in Portugal and Ireland has improved, Greece, Spain, and Italy are now the most threatened countries. According to most economists, no matter how this story ends, Germany will become the most powerful country in Europe. This story could just as accurately be called “The Rise of Germany” as “The Crisis in Europe.”

Greece

The bailout package that Greece was given in 2010 didn’t help. The growth of Greece’s economy decreased, and its financial situation worsened. In June 2011, S&P downgraded its rating of the Greek debt yet again to CCC. This is the worst possible rating that has also been assigned to countries like Cambodia, Cuba, Lebanon, and Vietnam. Georgios Papandreou, the Prime Minister of Greece, reshuffled his cabinet, and a vote confidence was set. He succeeded, and he has enough support to pass additional measures needed to ensure a second bailout. France and Germany have decided on another bailout package providing another $145 billion and encouraging private bondholders to help out.

Spain

The real estate bubble in Spain led to its own crisis, as was also seen in the United States and Ireland. The economic deficits were higher than expected, so the government was forced to adopt austerity measures in May 2010. Fitch and Moody’s downgraded their economy from rating AAA by a notch. In March this year, Spain announced that it had met its deficit reduction target for the previous year. The response? Moody’s downgraded again, and borrowing costs have soared. And the debate about a bailout package has moved to Spanish coasts. However, other European governments don’t hurry to help, saying that they can’t afford another loan. By the end of August 2011, Spanish politicians decided for a dramatic step to try to win back market confidence. They agreed on a reform of the country’s constitution to introduce a cap on future deficits. The cap would come into effect in 2020. The limit is set at 0.4 per cent, effecting all levels of Spain’s administration, including health and education. “Only a rebellion by socialist deputies, however, could stop the measure going through,” stated the Guardian.

Italy

Euro Notes by taxbrackets.org

The Eurozone’s third largest economy is in trouble: Italy has about 1.8 trillion euros of debt — more than Greece, Spain, Portugal, and Ireland combined. In fact, it would be extremely expensive and perhaps impossible to bail out. “The crisis in confidence that has battered financial markets and hit Italy in recent days is a threat for everyone,” Italian Prime Minister Silvio Berlusconi warned. Italy is now the third most indebted nation in the world, and its economic development is poor. Fears about the Italian debt crisis grew significantly after S&P downgraded its rating on Italian debt in May 2011. In June, Moody’s followed S&P. In July, Prime Minister Silvio Berlusconi won a confidence vote on a $56 billion austerity package. However, investors don’t want to take a risk, and they are selling off bonds.

Italy can’t rely on the help of other Eurozone countries because their respective economic crises and debts are too problematic, but it isn’t like Greece, depending on tourism or shipping. Italy is an industrial powerhouse; Fiat and other major manufacturers of automobiles are their biggest hope. “I think Italy is in a much better position than Greece still, but clearly the Europeans now need to make sure that Italy doesn’t go,” said Jonathan Tepper, partner at Variant Perception.

What Could Happen?

Specialists have proposed various possible scenarios. Some of them claim that the Eurozone will lose at least one member (Greece, Spain, or Italy), which could lead to a bleak future for the Euro. Another option that seems to be more probable is a European fiscal union. Fiscal and monetary policy will be coordinated at the continent level as it is done in sovereign states.

But virtually all economists agree that Germany is a key to solving the European crisis. “While the economies of most European Union countries have been languishing since 2008, Germany’s economy has been booming since the country managed to quickly emerge from the global financial crisis that hobbled many others,” wrote Daniel Schwartz for CBC news. Their economy is the largest in the European Union, although their latest statistics aren’t as favourable as they used to be.

Stratfor, an American strategic analysis group, claims, “Germany is on the verge of once again becoming a great power.” But the question is: how far will Germans go to help other European countries? After the Second World War, other countries didn’t have much mercy with Germany, but now their fate lies in the hands of the Germans.

There is also a particularly interesting prediction. George Soros, a famous billionaire investor, says that all of these crises will lead to a new economic era. The financial system based on debt isn‘t working, and more regulations are sorely needed. The system must undergo major changes. Only time will tell whether he’s right.