Possible Crisis Brewing in the Euro Zone

Just when it seemed like a possible bottom could be taking place in the world economy; a new crisis is shaping up in the Euro Zone. What is happening; is the high levels of debt that some of the weaker E.U. countries have, is starting to become an area of concern to both investors and traders recently. As the economy has continued to languish in Europe, many of the weaker E.U. countries have been facing the twin forces of high debt service obligations and falling tax revenues. This means that countries such as: Ireland, Greece, Portugal and Spain are faced with the challenges of trying to revive their economies; while their debt service obligations continues to rise. This has begun to cause concern among many of the different traders in the currency markets. As fears began to come to realization, that there would have to be drastic cuts in social programs and tight caps in fiscal spending for these countries. As a result, the Euro has dropped by 9% since December against the U.S. dollar. This is stoking fears that if any further declines that takes place in the currency, would cause the weaker economies of the E.U. to have trouble borrowing money on the world markets. The fear is that this could cause interest rates to sky rocket, making borrowing more difficult of these different countries. Once this takes place, it is only a matter of time until investors are reluctant to invest in some of the weaker countries. Greece in particular is the most vulnerable at this point, with the government taking steps to avoid such situations recently.

What this shows; is that those countries who saw the fastest growth in the E.U. before the recession are feeling the effects far deeper. As a result, they will be forced to have to engage in polices of fiscal restraint, which will involve cutting back on various services offered and possibly increasing taxes. These elements have the possibility of placing further drags on the E.U. economy, as all four nations account for nearly 20% of the total E.U. GDP growth each year. The real key going forward is going to depend on if the there will be stability in the Euro. If it can hold at current levels then a possible crisis in the works could be averted. However, if the Euro continues to decline against the greenback, then E.U. economy could be facing some challenges going forward.