First myth, the Eurozone’s common currency will remain strong even in times of recession because its members have pledged not to exceed budgetary deficits above 3% of GDP. Second myth, the EU unlike the US is not as concerned about pursuing a monetarist course (strong reserve currency) at the cost of growth, which the IMF has been advocating and imposing on borrowing members throughout its history.
Third myth, the EU inter-dependent integration model as compared with the US “dependency” model as expressed through NAFTA for example, will remain the key feature to attracting new members and expand into the largest economic bloc with the strongest economy and currency in the world. Fourth myth, integration into the Eurozone will lessen informal economies and strengthen legitimate trade to the benefit of all, owing to steady growth for the union. Final myth, Eurozone members are shielded from global contracting cycles more than the rest of the world. The current crisis has brought to the surface the reality that the Eurozone is a bloc captive to its strongest members, determined to compete with other dominant economies who have their own regional blocs, especially the US and Japan.
Along with private banking houses and rating firms, the IMF was optimistic that 2010 would be a year of recovery not just for China and India but for many of the advanced countries like US and Germany. The IMF and private financial houses were even more optimistic at the start of 2011 that the year would be better than the one before. That optimism was based on corporate growth of large businesses, growth that does not trickle down to small businesses, the middle class and labor.
Within the EU, growth prospects are even worse for Europe’s “PIIGS” – Portugal, Ireland, Italy, Greece and Spain (Belgium and Cyprus also belong in this group) all of which are targets by bond speculators and partly responsible for the euro’s and stock market slumps since January 2010. With 11.5% of the EU’s GDP, Spain is the fourth largest Eurozone economy confronting a budgetary deficit that is 9.3% of GDP (lower than the US percentage) and cumulative public/private debt that amounts to 207% of GDP (equal to Japan’s), while European average currently runs about 180%.
As of December 2009, Eurozone’s private debt as a percent of GDP was divided as follows: Businesses–73.6%; Households–61%; Mortgages–44.5%; and Credit card & consumer–16.5%. Credit will become much tighter as interest rates will be rising and banks will be reluctant to float loans. Because banks receiving bailout public funds reinvested to consolidate by strengthening their own and/or purchasing other banks, credit tightening has already choked the real economy and in 2010 interest rates will be going higher according to several EU central bank forecasts.