The economy in Europe has not been stable since the 2008 stock market crash. Eurozone, the economic union in which its members use the Euro as its sole currency, has been losing control of their debt. This has caused concerns of bankruptcy and countries defaulting (failing to pay financial obligation) on their debt. One member of Eurozone, Spain, has been on close watch. Spain has become the newest victim of towering bankruptcy and possibility of default. Their economic instability is starting to make investors and the rest of Europe concerned of what will become of the country’s economy.
According to the Associated Press, protests broke out in Madrid on Sept. 25 outside the Spanish Parliament concerning the economic state, the 25 percent unemployment rate and the fear of an austerity budget (a policy to reduce the deficit by cutting public services and benefits). The protesters amounted to hundreds, resulting in 38 arrests and 64 injuries.
BBC reported that Spain has released their budget plans for 2013. The plan includes cuts in ministerial spending, independent authorities monitoring government finances, increases in spending on student loans and pensions, freezes on public sector pay and an effort to cut spending to avoid rises in taxes.
Though a plan has been created, its stability has not yet been met. No government should allow their economy to fall. With Spain being the fourth largest economy in Eurozone, a default could cause widespread damage in Europe.
On Sept. 28, BBC reported that Spain’s banks would need 59.3 billion euros, or $76.3 billion, to avoid a default. The United States debt of $16 trillion cannot compare to the amount Spain needs, but the United States’ government avoids default by raising the debt limit (the amount the government can borrow) which occurred last year. Spain’s debt situation, however, is more complex.
One reason why Spain is now under fire for default is that investors are being driven away, as reported by CNN. Money continues to be pulled out of their country, leaving Spain to borrow more money from other sources and countries, which unpaid debts will result in default. CNN also gave the reminder that the banking system in these European countries are critical, calling them the “lifeblood of their economy”, and calling the state of Spain’s economy “the perfect storm.”
The global economy has been coming back since the 2008 stock market crash–the worst economic crash since the Great Depression–but it is still not stable. One outcome that will occur is the decreased value in the Euro. Since Spain is under the Euro currency, if they default it affects all other countries that are in the European Union and use the Euro, and will cause the value of the Euro to drop. Economic blogs on Telegraph and MarketWatch suggest that Spain should leave the Euro and establish their own currency. If they did this, the effect of their economic collapse would not bring other economies down. This is an option that Spain needs to take into deep consideration. If they continue to be under the Euro, they continue to be a factor that will bring most of the European economies down.
Spain is not the only country that is on the brink of default. Greece has been closely watched for the last year on the fear for their debt, which has reached $407 billion in July, according to BBC. Greece also had riots on Sept. 28, reported by Associated Press, when over 50,000 people protested in Athens due to austerity and budget cuts, making this the largest protest in Greece in six months. Protestors threw gasoline bombs, while police used tear gas to disarm them. This was a 24-hour strike that was the result of austerity policies being adopted into the Greek government. Their attempts of trying to stabilize the Euro in Greece have failed multiple times, resulting in more protests. Greece has had riots and economic issues for over a year now, and so far no default has been declared. Whether or not they will soon is unclear at this time.
The fate of Spain, Greece and ultimately Eurozone, is still up in the air. If these countries default, economies will suffer. Marketwatch reported two possible outcomes on the United States if Spain does default. First, loans to the country will not be paid, causing a chain of companies to borrow from other companies, or a “contagion reaction.” The other outcome depends on the economy’s state. If the economy is not doing well, businesses are at a major risk of closure. If the economy improves, then U.S. companies can lend to them more money. The drawback to this though is companies in the United States lose money. No matter the outcome, the American economy will be damaged from these defaults. All that can be said now is governments must meet together and find a solution to their deficits before more damage to the global economy occurs.
Sarah Garrity can be reached at sarah.garrity@spartans.ut.edu