Tyler Monteros The Global Economy 08/08/2012

A paper presented to Professor Leon Cort In partial fulfillment of the requirements for the Global Economy course (MGMT 585). Wentworth Institute of Technology Summer 2012

A Worldwide Mess: A Look at the Greek Debt Crisis, and how it threatens the Eurozone and the US Economy
The Greek Crisis Explained
Over the last several years, many of the worlds richest nations have experienced historically deep contractions in economic activity. The global economic dam began to burst in 2007, when United States economy fell into a deep recession following a housing market crash. Across the Atlantic, the mighty European Union was rocked to its core by the European Sovereign Debt Crisis, which began in earnest in 2009. Ironically enough, this crisis originated in one of Europes smallest countries the Third Hellenic Republic, commonly known as the country of Greece. In a heavily globalized and integrated world economy, the problems of this small country could undermine the long-term economic health of both Europe and the United States. The root cause of Europes current financial maelstrom stems from the economic climate in Greece, a country which has virtually collapsed under a mountain of sovereign debt. The term sovereign debt can be defined as when the government of a sovereign state, such as Greece, is unable to pay back its debts to its creditors. The Greek government has struggled with balancing its budget for a number of years, largely because it is heavily dependent on just two industries shipping and tourism for the bulk of its revenue. Worldwide consumer spending declined significantly in the wake of the 2008 global economic crisis. As businesses and families alike tightened their budgets, they spent less money on imported foreign goods and overseas vacations. These developments hit Greece especially hard, as revenue from its exports and tourism industry declined significantly. While this lack of tax revenue certainly can be blamed for stunting Greek economic growth, it would be incorrect to blame these developments alone for Greeces troubles. Instead, these problems served to hasten the inevitable economic collapse brought about by Greeces shortsighted fiscal policies. By looking at the Greek governments spending habits, the primary cause of Greeces problems becomes quite clear reckless government spending. During 2008, the Greek government ran a budget deficit that was 9.8% of GDP (Dalton and Norman). By 2010, this figure stood at 10.5%, exceeding European Union (EU) forecasts (Dalton and Norman). The countrys finances didnt fare much better in 2011, as Greece still reported a budget deficit of 9.1% of GDP (Greeces Budget Deficit).

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It doesnt take a degree in economics to understand that such rampant government spending is simply unsustainable, and is chiefly to blame for Greeces current economic malaise. After several years of unbalanced budgets, the Greek government finds itself drowning in red ink; by the end of 2011, Greeces total debt stood at 165.3% of GDP, giving it the highest debt to GDP ratio in all of Europe (In graphics: Eurozone crisis). The monetary value of this debt is equally imposing, especially for a small country like Greece. In May 2012, the Sydney Morning Herald reported that Greeces total outstanding debts amounted to 350 billion Euros, or roughly 430 billion in US dollars. Unable to pay back its debts, Greece was forced to seek outside assistance. With the promise of an implementation of austerity measures, the IMF (international monetary fund) granted the Greek government a bailout of 110 billion in May of 2010. A mere 17 months later, Greece was forced to seek a second loan of 130 billion, this time from the Eurozone. In less than two years time, Greece had been given outside monetary assistance in excess of 240 billion. Within Greeces government there is a department responsible for public finance, known appropriately as Ministry of Finance. In early 2010, the Ministry of Finance acknowledged five reasons as to why Greeces economy was rapidly deteriorating. The five highlighted issues outlined by the Greek government are as follows: Sub-par GDP growth rates Government deficits Extensive government debt Political budget compliance Flawed/unkempt statistical data.

All of these issues have continuously plagued Greece since its entrance into the Euro back in 2001. In 1994, Greece had a debt to GDP ratio of approximately 94%. Economists have determined that the maximum sustainable debt-to-GDP ratio that Greece can sustain is 120%. In the last several years, the Greek economy has been hindered by exorbitant government salaries and counterproductive bureaucratic laws, stymieing the countrys annual GDP growth. This problem was exacerbated by the Greeces addiction to overspending, as the country failed to lower its government debt levels during its good years. The chickens from this foolish policy have now come home to roost many foreign banks are understandably reluctant to lend to a debt-ridden Greek government. Even as its economy fell off a fiscal cliff, Greece was unable to balance its budget. The failure to fulfill this basic governmental responsibility continues to be an anchor around the neck of the Greek economy. It is absolutely mind-boggling that the Greeces government could be so fiscally irresponsible, to the point where the Greek economy would completely implode without EU aid. By the summer of 2012, the prospect of Greece leaving the Eurozone became a very real possibility. A Greek exit from the Eurozone, either by choice or by force, would have dramatic consequences for the average Greek citizens standard of living. Greece is not only guilty of mismanaging its finances; the country has also consistently presented inaccurate and skewed financial data to the EU. Since joining the Eurozone in 2001, Greece has gained a notorious reputation for reporting bogus data regarding its economic

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standing. Thanks to this thoroughly misleading information, Europes political leaders were taken completely by surprise by Greeces sudden and severe economic decline in early 2010. After being chastened by its creditors for its lack of honesty, Greece created the National Statistic Service in early 2010, with the purpose of providing accurate economic data to Eurozone members. In retrospect, it is fairly easy to see why Greece finds itself mired in a horrific economic downturn. The country spent much more money than it actually had, and then lied about it to the rest of Europe. It goes without saying that the Greek economy would be in far better shape had Greece practiced sound fiscal policies, such as those used to great effect by Germany. In fact, the end results of the two nations budgetary policies are plainly evident in the Eurozones efforts to prop up the failing Greek economy most of the rescue funds are provided by none other than the Federal Republic of Germany.

The Consequences of the Greek Debt Crisis on the Greek Economy

As made blatantly obvious in the preceding section, Greece has long been a country which lived well beyond its means. This overspending began in earnest around Greeces admission into the Eurozone in January 2001. From 1999-2005, the wages of public sector employees soared by 50%, contributing in no small part to Greeces budget deficits. Compounding this problem was widespread tax evasion on the part of affluent Greek citizens. Greece has long struggled with tax collection, as many Greeks routinely find ways to hide income from the tax collecting authorities. This perfect storm of overspending and insufficient tax revenue has had a devastating effect on lives of Greek workers. Today, Greeks are all too familiar with terms such as unemployment, austerity cuts and tax increases. The Greek populace has also been forced to accept painful reductions in government pensions. Greeces current unemployment rate ranks among the worst the country has ever seen. In the relatively short span of four years, unemployment in Greece has more than tripled. In May of 2008, Greek unemployment stood at a stable 7.3%; by April 2012, it had reached 22.5%. Some economists believe that the Greek unemployment rate may reach 25% by the end of 2012. As if the small Mediterranean country was not beset by enough problems, the EUs bailout package came with a number of strings attached, known officially as conditionalitys. For the first bailout, Greek leaders agreed to steep cuts in pension and public service pay. These concessions were only the tip of the iceberg, as the EU forced Greece to agree to the following austerity measures: Scrapping bonus payments for public sector workers Capping annual holiday bonuses Banning increases in public sector salaries and pensions for at least three years Increasing VAT (value added taxes) from 21% to 23%; Raising taxes on fuel, alcohol and tobacco by 10% Taxing illegal construction. These conditionalitys were certainly bitter pills for the Greeks to swallow, and even led to rioting in the streets of Athens. Unfortunately, Greece had little choice other than to agree to

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these terms. As the bailout money began to flow into Greece, the entire EU watched closely to see if their rescue package would work. Little more than eighteen months later, the EU got their answer, and they couldnt have been pleased by the results. By February 2012, it was obvious that Greece had underestimated the amount of assistance it needed from the EU, as the Greek government missed its budget deficit reduction goals. Furthermore, Greece failed to fully comply with the set of conditionalitys attached to the first bailout package. Despite the ineffectiveness of the 2010 bailout, and Greeces own inability to meet the EUs austerity requirements, European leaders scrambled to prevent Greece from defaulting on its debts. Such a scenario would almost certainly send major shockwaves through the Eurozone, placing additional pressure on other countries struggling with debt, such as Spain and Italy. Though European leaders were understandably miffed at having to rescue Greece for the second time in two years, the looming consequences of a Greek default were enough to keep the EU assistance spigot flowing. In February 2012, the EU signed off on a second Greek bailout package, this time to the tune of 130 ($172 billion). With this second bailout came even harsher austerity measures. In accepting addition Eurozone funds, Greece was required to adhere to the following conditionalitys: 22% cut in minimum wage Discontinuation of holiday wage bonuses Elimination of 150,000 government jobs 2015, of which 15,000 must be cut by the end of 2012 Pension cuts worth 300 million in 2012 Changes to laws to make it easier to lay off workers Cuts in health and defense spending cuts Industry sectors must be allowed to negotiate lower wages based on the health of the economy Certain sectors of the Greek economy, such as the tourism, health and real estate industries, must be reformed to allow for more competition Privatizations worth 15 billion of state-owned firms by 2015, including Greek gas companies DEPA and DESFA. With the most recent round of austerity measures, it is commonly understood that Greece will undoubtedly face at least an additional year or more of recession. Thus, it appears that things in Greece will get worse before they get better.

Greeces Future in the EU

Concerns that Greece could renounce its debts and jump ship from the Eurozone reached a crescendo in June 2012, as the socialist anti-bailout Syriza party appeared poised to capture control of the Greek parliament. Had Syriza triumphed, its leader, Alexis Tsipras, pledged to repudiate the terms of the February 2012 bailout agreement with the EU. Such an act would almost certainly set the stage for Greeces imminent departure from the Eurozone. This scenario was averted by the narrow electoral victory of the New Democracy party, which vowed to fulfill the terms of the EUs rescue package.

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Despite the results of the June 2012 election, an eventual Greek exit from the Eurozone still remains a very strong possibility, if not a forgone conclusion. Citigroup, one of the largest investment banks in the United States, puts the chances of a Greek exit from the Eurozone within the next eighteen months at 90% (Farrell). Should Greece bolt the Eurozone, countries facing similar economic turmoil would fall under immediate pressure to follow suit. Lucinda Creighton, Irelands Minister for European Affairs, described how Greeces potential abandonment of the Euro could spell doom for the worlds largest monetary union: If Greece were to exit today, tomorrow morning the markets would be circling around Ireland and other bailout countries, [speculating about] when are they going to exit. So we need to think very carefully about the implications, not just for Greece but the rest of the Eurozone countries." (Major Implications) If Greece were to ditch the Euro, it would presumably revert back to using its preEurozone currency the drachma. The transition would be a rocky one at best; Greece would be forced to print a massive amount of drachmas to pay off its debts. As a deluge of drachmas pour into the market, the new currency could easily plummet 50-70 percent in value against the Euro within a short timeframe (Thomas Jr.). The reintroduction of the drachma would also trigger bank runs, as panicked Greeks attempt to withdraw their Euros before they are converted into far less valuable drachmas (Thomas Jr.). The pain would not stop there; due to unfavorable currency exchange rates, the cost of badly-needed imports would skyrocket (Kakissis). Essentially, everything from gasoline to imported meat would cost far more for the average Greek to purchase. In addition, new banknotes and coins would have to be produced to support the drachma. As of this writing, Greece has yet to begin minting and printing the money needed to replace the Euro (Kakissis).

The Crisis Spreads through Europe

Perhaps the most obvious effect of Greeces economic collapse relates to European imports and exports. EU members are rightfully nervous about opening new business relations with Greece. As stated by Liz Alderman of the New York Times, Two of the worlds largest import-export insurers, Euler Hermes and Coface, have recently refused to cover transactions involving companies in Greece, imperiling the import of basic goods. This quote succinctly describes how surrounding European countries are being dragged into Europes burgeoning economic sinkhole, as Eurozone members are increasingly reluctant to export goods to Greece and other struggling nations. In fact, the World Trade Organization (WTO) reports that Greek imports crashed by 20% in 2011 (Trade Growth). Aldermans article further explains that foreign firms are steering clear of the Greek market altogether, refusing to devote valuable resources in a rapidly deteriorating Greek economy: Global businesses and investors are retreating both because of the uncertainty on whether they might be paid someday in a devalued currency, and because domestic consumption has plunged after three years of painful austerity. [] Sales of clothing and pharmaceuticals have slumped, and even gas purchases are down as people drive less to save money

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As shown by the preceding excerpt, foreign firms are not only sending fewer products to Greece, but Greek citizens are increasing cutting back on their purchases of all goods, including imports. Essentially, financial decisions are being tailored to avoid investing in a country that needs all the capital it can get, perpetuating a vicious cycle of economic contraction and rendering Greece even more dependent of the generosity of its creditors. In effect, Greeces problems have become Europes problems, and the continents economy is suffering as a result. This widespread reluctance to conduct trade with flailing countries has not gone unnoticed by the worlds banking elite. The head of the International Monetary Fund (IMF) Christine Lagarde, has noted that a crisis of confidence has stunted trade and commerce in countries throughout Europe (Plumer). As alluded to by Lagarde, snake-bitten investors are not only avoiding business relations with Greece, but are also fleeing other distressed economies like Spain, Italy, Portugal and Ireland in droves.

The Spanish Economy Crumbles

From the onset of the Greek economic crisis, European politicians have feared that Greeces economic problems would spill over into other Eurozone countries. Such concerns were very well-founded, since Greece was far from the only Eurozone member to pursue shortsighted economic policies. As Greeces problems worsened, they began to drag down the economies of two other nations in particular Spain and Italy. After news of the Greek debt crisis hit the financial markets, foreign investors became understandably weary about buying bonds from countries in similarly poor financial shape. This development put an especially heavy strain on the Spanish and Italian economies. However, while both countries find themselves facing severe recessions, the reasons behind their economic woes differ significantly. The Spanish economy was undermined by an economic phenomenon that should sound painfully familiar to Americans a housing bubble. During the 2000s, the Spanish housing sector was artificially inflated by a massive influx of foreign capital and low interest rates for home loans (Plumer). The housing market reacted accordingly; from 1997 to 2007, real estate prices in Spain increased by an astounding 200% (Borsi). In addition, the country went on a long construction binge; during the bull years of the housing market, roughly 300,000 new homes per year were constructed (Stucklin). Spains robust housing sector allowed the country to experience an era of healthy growth and prosperity; from 1999 to 2007, the Spanish economy grew by an average of 3.23% per year (indexmundi.com). Spains consistent growth in GDP stood in stark contrast to its neighbors, who were often lucky to experience annual GDP growth exceeding 2% (indexmundi.com). By 2007, 8 out of 10 Spaniards owned the homes they lived in. The good times were a mirage, however, as housing construction far outpaced the number of Spanish citizens able to pay for home ownership. It soon became readily apparent that the country had built too many homes, with virtually no one available to purchase them (Plumer). The housing bubble finally popped in 2008, closing the curtain on Spains decade-long period of economic expansion. Spain quickly sank into a deep recession that it has yet to emerge from; in fact, the countrys economic fortunes appear to be worsening. By May 2012, Spanish unemployment had reached the almost unimaginable rate of 24.6%, while its GDP shrank by 0.4% in the second quarter of 2012 (Spain Unemployment; What Happened in Europe).

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Spains misery was further compounded by Greeces economic meltdown. When the full scope of Greeces financial troubles became public knowledge, investors began to heavily scrutinize the condition of the Eurozones other faltering economies. It did not take long for bond buyers to realize that Spains banks were in a precarious position, as many Spanish banking firms held dangerously high amounts of bad loans (Plumer). The majority of such loans were given Spanish property developers, who thrived during the countrys housing bubble. When the housing bubble burst, these developers found themselves unable to pay back the banks that lent them generous sums of money (Aguado). As of July 2012, Spanish banks had 155.84 billion euros ($192 billion) worth of at-risk loans on their books (Non-performing loans). Suddenly loaded with mounds of toxic assets, Spanish banks begged the government of Spain for help (Eurozone crisis explained). This task proved too costly for the Spanish government to handle on its own, and the country was forced to ask the Eurozone to rescue its banking sector. A 100 billion bailout (125 billion in US dollars) was shipped to Spain in June 2012, providing temporary relief to Spains ailing banking giants (Strupczewski and Toyer). However, even this massive loan may not be enough; Fox Business News reported in late July that Spain has initiated discussions with Germany about a second Eurozone bailout package. This cost of this additional assistance would come to 300 billion. Spains credit crunch has not only shattered the Spanish economy; it has also made it much more difficult for Spain to obtain the funds needed to run its government. Foreign investors are increasingly reluctant to buy Spanish bonds, correctly reasoning that a government unable to save its own banks without help cannot be trusted to repay bondholders. Consequentially, Spain now must offer an absurdly high yield on its bonds to secure investment foreign investment. As of August 2nd, the yield on Spanish 10 year bonds stands at over 7 percent (Meakin and Charlton). Generally, bond yields in excess of 7 percent are considered unsustainable, essentially preventing a country from borrowing money from outside sources. Spain has become the most worrisome economy for the European Union; its economy is five times the size of Greeces, and its banks are teetering on the brink of insolvency (Spain). Spains misery shows no signs of abating anytime soon. Writing in the New York Times, Jonathan Blitzer noted that the European Commission predicted that the Spanish economy would be in recession until through the end of 2013. Blitzer also emphasizes that while Spanish banks were able to withstand the 2008 American financial meltdown, the ensuing worldwide recession and collapses of the Spanish housing sector broke the back of Spains banking sector.

Italy: Corruption and Financial Mismanagement

As if the Eurozone was not under enough stress from the dual crises afflicting Greece and Spain, the economy of Italy also appears to be buckling under a massive load of debt. The problems facing Italy play out as a rehash of the Greek debt crisis; Italys current debt is 120% of the nations GDP, and is forecast to rise. As with Greece and Spain, Italys economic future appears exceptionally bleak; the International Monetary Fund predicts that the Italian economy will show virtually no growth in the next decade (Italy). Unlike Greece, whose creditors consist mainly of foreign banks and governments, the bulk of the Italian government debt is held by Italys own banking sector (Italy). The weakest link in Italys economy appears to be the autonomous island region of Sicily. Sicilys overspending is arguably the biggest contributing factor in the countrys economic downturn. As

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of July 2011, this small island has somehow managed to rack up debts of more than $6 billion, further straining Italys finances (Poggioli). How did such a small region of Italy accrue so much debt? The answer lies in the nature of Sicilys government, which is brimming with politically-connected (and largely extraneous) government workers (Poggioli). Essentially, the Sicilian public sector is extremely bloated and grossly overstaffed, as many politicians are more than willing to provide cushy government jobs in exchange for votes (Poggioli). The islands dependence on public sector jobs has come at a great cost to Sicilys economy, as very little money has been invested in infrastructure or private industries since the conclusion of World War II (Poggioli). The irresponsible economic policies of Sicily exemplify a problem that has plagued Italy since the 1980s. In short, the country has spent money it simply does not have, causing the total amount of its national debt to soar. Italy could afford to play this risky game as long as its GDP continued to expand by healthy amounts each year (Weissman). When the countrys economic growth dried up, the faade finally caved in on itself. In 2001, Italian growth slowed to dangerously low levels; the 2008 worldwide recession pushed it into negative territory (Weissman). Consequentially, Italy is having an increasingly difficult time paying its interest payments on its outstanding debts, running into the same problem that helped tank the Greek economy (Weissman). This has spooked foreign investors, who are now demanding increasingly high yields in exchange for loaning Italy money. As of August 2nd, Italys 10 year-bond yield stood at 6.3 %, alarming close to the 7% threshold widely considered to be unsustainable (Stubbington). The future health of Italys economy will likely be determined by its ability to reduce government spending (Italy). Currently, Italy is working in conjunction with IMF, the European Commission and the European Central Bank to save its sinking economy. The Italian government has desperately tried implementing some fiscal reforms in an effort to drive down bond yields, a strategy which has so far proven ineffective (Monti warns markets).

Greeces Impact on the United States Economy

While the effects of the Greek crisis on Europe are fairly self-evident, there is also a significant possibility that the United States will be adversely impacted by Greeces economic woes. The direct exposure of US banks to Greece itself is very limited; US investment bankers have wisely divested from Greek debt, to the point that American financial institutions have only $6 billion in outstanding loans to Greece (Schoen). The problem becomes much greater, however, when the loans extended to all Eurozone members are taken into account. Currently, US banks have approximately $4 trillion dollars in exposure to European nations (Lawder and Somerville). Consequentially, the economic fallout of a wide scale European default on U.S. loans could easily spark a downturn in the US economy. In November 2011, Federal Reserve Chairman Ben Bernanke bluntly confirmed this possibly, stating that such a scenario is not something that we would be insulated from ... I don't think we would be able to escape the consequences of a blow-up in Europe (Lawder and Somerville). The gears behind such a worldwide meltdown may have already been set in motion, with Italian banks representing the potential catalyst behind such a disaster. As of November 2011, Italian banks owed roughly $939 billion to foreign creditors, with loans from French banks accounting for a significant slice of this tab (Lawder and Somerville). The Bank for International Settlements, an intergovernmental organization that helps coordinate worldwide banking

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policies, reported that French banks were on the hook for 332 billion (approximately 408 billion in US dollars) in loans to their Italian counterparts (Ewing and Jolly). Like the Greek and Spanish governments, the Italian government has racked up a staggering amount of debt. As of July 2012, Italys government debt stood at 118% of GDP, or about 1.95 trillion euros (Knight). This figure is predicted to reach 126% of GDP by 2013 (Schneider). Such a massive government debt puts a massive strain on Italian banks, which provide funds for the Italian government in exchange for government bonds. By the end of May 2012, Italian banks held 302.53 billion euros ($372.10 billion) in Italian government debt (Reuters). There is evidence to suggest that the Italy might be forced to seek external bailouts in order to pay its bills. In early July 2012, Italian Prime Minister Mario Monti admitted that Italy may be forced to seek Eurozone aid to help pay bondholders (Landini and Emmott). A bailout similar to those crafted for Greece and Spain would be impossible to construct for Italy, as the country represents the third largest economy in the Eurozone, making it simply too large to effectively bail out (Landini and Emmott). A worst-case scenario in which Italian banks were forced to seek bailout funds could cripple the economies of all Eurozone members. The first domino to fall would be in France, as French banks high exposure to Italian debts put them at great risk of insolvency. If French banks are forced to ask for assistance, the ripple effect would be most felt by the largest foreign holders of French debt Germany, the United States and the United Kingdom (BBC). The Washington Posts Brad Plumer summarized this possible chain reaction in the following paragraph: Further complicating the Eurozone debt crisis is the prospect that Greece may decide to leave the Euro entirely. Such an exit could cause yet another row of economic dominoes to fall throughout Europe. First, Spanish and Italian bond yields (the interest those countries must pay to bond investors) could soar to unmanageable levels, preventing both nations from securing badly needed foreign investment. Second, both Spain and Italy could follow Greeces example and jump ship from the Euro, causing panicky bond investors to flee from a crumbling Eurozone in droves. Reuters reporter Stella Dawson explained in a May 2012 article how a Eurozone breakup would sink the US economy: The economic impact in the United States would be felt through trade, financial linkages and business and consumer confidence [] At the very least, shockwaves through financial markets would cause a downward jolt to the U.S. economy, immediately erasing at least half a percentage point from growth in that quarter. If Europe's banking system shuts down, violent shudders through global financial markets would equal or surpass those seen when Lehman Brothers collapsed in 2008 [] At the very least, the U.S. and global economy would fall back into recession, and some economists warn it would be far deeper and more dangerous than the one of 2007-2009. The U.S. Fed would be almost certain to embark on a fresh round of bond buying, known as quantitative easing, to keep financial markets highly liquid and hold interest rates low. It would be a profound understatement to say that the United States conducts a significant amount of trade with Eurozone members. According to the United States Census Bureau, the US exported $268.5 billion worth of goods to EU members in 2011 alone. In fact, the 17 nations of

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the Eurozone represent the third largest market for US goods, trailing only Canada and Mexico (Isidore). Obviously, a Eurozone collapse would dramatically decrease demand for US goods, dealing a heavy blow to an already shaky US economy.

The Immediate Future of the Eurozone and the US economy

To solve the growing the continents growing debt crisis, a number of European politicians have called for the European Central Bank to issue Eurobonds. Under this idea, Eurobonds would be issued jointly by the Eurozones 17 members (Walker). Given the relatively low borrowing costs for Germany and France, this would allow distressed countries like Greece to borrow money at much lower rates (Walker). One such Eurobond proposal, crafted by Italian and Luxembourgian politicians, would allow troubled European countries to fund 60% of their annual debt-to-GDP ratios with Eurozone funds. When it comes time to repay Eurobond holders, each of the 17 nations would pay a proportional slice, equal to the amount they had borrowed. In theory, the Eurozones struggling members would be able to pay the Eurobonds lower annual bond interest payments, allowing them to repay creditors as they reduced government spending to manageable levels (Walker). Supporters of Eurobonds include French president Franois Hollande, Italian Prime Minister Mario Monti, Spanish Prime Minister Mariano Rajoy and Greek Prime Minister George Papandreou (Inman; Greek PM). Not surprisingly, Germany is not exactly thrilled at the prospect of paying for Eurobonds. While the yields charged to Italian, Spanish and Greek bonds would drop, merging the borrowing costs of all Eurozone members would mean higher bond yields for Germany. Issuing Eurobonds could cost the German government an extra 50 billion Euros each year to finance its expenses (Q & A: Seven questions). Germany also lacks trust in its southern neighbors, questioning if the Eurozones floundering countries will learn from their recent mistakes. After years of debt-fueled economic bubbles, the German government is highly skeptical that nations such as Italy and Greece will suddenly become models of fiscal responsibility. Germany understandably fears that the benefactors of Eurobonds will simply use them to enjoy inflated standards of living on the backs of the German taxpayer (Walker). The Eurobond proposal may very well be dead in the water. German Chancellor Angela Merkel has voiced strong opposition to Eurobonds, stating in no uncertain terms that issuing Eurobonds runs counter to the best interests of Germany. In a June 2012 meeting with fellow German politicians, Merkel explicitly rejected the idea of offering European-wide bonds: [...] on Tuesday, ahead of the crucial European Union summit in Brussels on Thursday and Friday, [Merkel] was clearer than ever in her rejection of debt sharing across the common currency area. During a meeting with parliamentarians from the Free Democratic Party (FDP), her junior coalition partner, she said there would be no full debt sharing "as long as I live." SPIEGEL ONLINE was told that several FDP lawmakers responded by saying: "We wish you a long life." (Merkel Vows No Euro Bonds ) The German public is likewise dead set against Eurobonds. A May 2012 poll conducted by ZDF television, a German public television station, found that 79 percent of Germans were opposed to putting Eurobonds on the bond market (Most Germans Oppose Eurobonds). If the Eurobond solution is indeed killed by German opposition, there appears to be no Plan B to fix the Eurozone crisis (Vigna). With no viable alternative, the rapid dissolution of the

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Europes monetary union has become a very real possibility. Wall Street Journal columnist Paul Vigna wrote about the impending end of Eurozone in a May 2012 column: Hey, give the Germans credit for showing some backbone. The problem is, though, [rejecting Eurobonds] leaves Europe at another crossroads; only theres no road on the other side. There have been two main responses to the crisis: austerity, and kicking cans down roads. Austerity, in case you havent noticed, is so last year. Its out. Which means that unless something else is found, some other comprehensive plan, the other main response, can kicking, is going to run out of road? Just about everybody backed the idea of Eurobonds, except for the Germans, and since theyre the ones with all the money, theyre kind of the only ones whose vote counts anyway. So, its time to go to plan B. Only theres no Plan B, and theres no time, either. The death of the Eurozone may come sooner rather than later. On August 2, Spanish Prime Minister Mariano Rajoy hinted that Spain might seek additional financial assistance, although he stressed that Spains government would have to weigh the conditionalitys of such a bailout before accepting Eurozone aid. In addition, Italy may soon join Greece, Spain, Portugal, Ireland and Cyprus in asking for a bailout. Many observers continue to speculate that Italys mounting debts will eventually force it to apply for a financial lifeline (Dinmore). There seems to be little that Europes leaders can do to prevent recession from engulfing all of Europe. By the same token, the economy of the United States is heavily tied to Europes fortunes; thanks to massive bank loans and a heavy dependence on foreign trade, an economic implosion in Europe is almost certain to send heavy shockwaves across the Atlantic. The sovereign debt crisis in Europe warrants the full attention of the American public, as Europes problems could land at Americas doorstep in the very near future.