The FINANCIAL -- The eurozone is mired in a deep crisis as we speak.
Greece has already defaulted on some of its debt, and bigger countries like Spain and Italy are not looking too good either. The euro is at a two-year low against the dollar, and unemployment across the Europe is skyrocketing. And it is not just the euro countries that are suffering: the economic uncertainty that the crisis has brought about have sent shockwaves through the world economy. In this article, I will discuss the specifics of the crisis, how it can affect you, and what you can do to protect yourself.
Other debt crises -- The eurozone crisis is far from the first debt crisis in history. Time and time again, countries have had to deal with problems in their financial systems, enormous amounts of debt, and, eventually, default. For example, Russia defaulted on its debt as recently as 1998, after its own financial crisis, and Argentina defaulted in 2001 during its peso crisis.
A unique crisis -- Even though debt crises are common, what is happening in Europe right now is unique, because the countries in the eurozone tied themselves to a common currency: the euro. This means that these countries effectively lost control of monetary policy, or to put it bluntly: they no longer control the printing of money. This function is now fulfilled by the European Central Bank (ECB) in Frankfurt, which has to set a monetary policy that is as optimal as possible for all countries in the eurozone. For a country that has a lot of debt, like Greece, higher inflation may be a more optimal policy, because it will reduce the real value of the debt, and increase employment in the short-run. However, for a country like Germany, that does not really have a debt problem and already has low unemployment, high inflation will be suboptimal. Because different countries have different optimal monetary policies, the policy set by the ECB will never be optimal compared to the policy set in case of a country having its own currency.
Another aspect that makes the eurozone unique is its lack of a common fiscal policy. In other large single-currency areas, such as the United States or China, the federal government can decide to allocate more funds to regions that are suffering. While the European Union has some budgetary power, the overwhelming majority of the funds are still being spent by national governments, and taxes are paid to national governments. There are forces with the European Union pushing for a “transfer union”, which would look more like the American model, but these plans are unlikely to be realized soon, because of popular opposition. This means that some eurozone countries are stuck with a monetary policy that is not well-suited for them, while fiscal help from the rest of Europe is unlikely.
What will happen -- The Eurozone, supported by the International Monetary Fund, has been busy “bailing out” its weaker members, such as Greece, Spain, Portugal, and Ireland, by offering them loan packages, in exchange for drastic economic reforms. The European Central Bank and the European Financial Stability Facility have also been buying up bonds of weaker countries, to keep their borrowing costs from rising too much. Investors have been waiting for “end game” for quite a while now, but it does not seem likely that a final solution is to be expected soon: European leaders have been “kicking the can down the road”, or in other words, trying to fix long-term problems with short-term solutions.
Will Greece leave the Eurozone? Most economic analysts expect it to do so within the next year, although Greece still says it won’t. A Greek exit (“grexit”) will have bad consequences for Greece, but the consequences for the rest of the world won’t be very severe, since Greece is only a small country. A default or even a eurozone exit by Spain or Italy, two very large countries, would be disastrous, but does not seem likely. In any case, economic growth in the eurozone will remain low or even negative for the next few years, and unemployment is likely to remain high, especially in southern Europe.
How the crisis can affect you -- Because of Georgia’s interconnection with the eurozone, it has been and will be affected by what happens there. A global economic slowdown would also heavily impact Georgia, because it is an important transit country for global trade. If you have a business that exports product to the eurozone, you may be faced with a serious decline in demand.
Furthermore, Georgia is heavily dependent on remittances from abroad, and a large part of those remittances comes from the southern European countries hardest hit by the crisis. In fact, Greece is the second largest source of remittances for Georgia, after Russia. Many of those sending money home work in low-paid jobs, which they could easily lose if the economy gets worse. In fact, over the last few months, we have seen a slight decrease in remittances coming from Greece. Because the decline in the value of the euro, the remittances that Georgians working in the eurozone send home will also be worth less for the people receiving them in Georgia.
How you can protect yourself -- If you are dependent on remittances from eurozone countries, now is probably a time to start looking for other sources of income as well, because those remittances may dry up, and in general, relying on other people’s money is rarely a good strategy.
If you are a Georgian company that does a lot of business in the eurozone, it is a good idea to diversify into other markets if you have opportunities to do so. Other (emerging) markets offer much greater growth potential, even though the demand might not be as strong yet. While emerging markets are impacted by the crisis as well, the impact is much lighter than in the eurozone itself.
If you have money in euros, it may be a good time to move that money to a dollar or lari account, because we will see high euro volatility. Depending on the news that will come out of Europe, the euro can either go up a lot or down a lot, so there are opportunities to make profits trading currencies, but if your main concern is to protect yourself, don’t hold too much money in euro accounts.
If you are interested in investing, now might be a good time to invest in European stocks or bonds, because valuations are really cheap. However, if you have little investing experience, and no familiarity with the European market, stay away. While some people always manage to make money investing during crises, most people get badly burned and lose a lot of money. If you have never invested in European stocks or bonds before, now is probably not a good time to start. The key to being a good investor is not only to make a lot of money when the market is going up, but also to avoid losing too much when the market is going down.
However, most importantly perhaps, try to understand the lesson that the current eurozone crisis teaches us: if your finances are not in order, or you borrow too much, it will eventually come to haunt you, no matter whether you are a taxi driver or a country.