It appears the eurozone has entered a deeper recession than the one caused by the 2008 financial crisis. The eurozone’s unemployment rate now stands at 10.7 percent, half a percentage point higher than at the peak of the last recession and the highest in the euro’s history. The rates for the most troubled countries are even more shocking, with 19.9 percent for Spain and 23.3 percent for Greece. Unemployment among the young is simply dismal, with rates of 48.1 percent in Greece and 49.9 in Spain for workers under 25 years of age. Carl Weinberg, chief economist at High Frequency Economics, called the numbers “appalling.”
Though world leaders praise the latest bailout for Greece, economists anticipate another global recession arising from Europe’s debt crisis, and a serious one at that. With Europe having a larger population, a larger banking system and more Fortune 500 companies than the U.S., a European financial system crash is sure to send shockwaves through markets around the globe.
Analysts say several signs indicate a rapidly deteriorating situation in the eurozone. As of now, the European Central Bank is refusing to accept Greek bonds as collateral from European banks. This is due to a Standard & Poor’s downgrade of Greek debt to “selective default” status. Although the Central Bank claims the measure is temporary, it still does not bode well for holders of Greek debt.
Even worse, European banks are reporting huge losses on Greek debt. Four of the eurozone’s biggest banks have revealed losses of more than 8 billion euros on their shares of Greek bonds, according to Reuters. One chief executive called it “the worst economic crisis since 1929.”
Although Greece appears set to receive a second bailout of €130 billion, the International Swaps and Derivatives Association says private bondholders will still not receive payouts on credit default swaps, which were sold as a form of protection against bad investments. As a result, bondholders will be less likely to support the bailout, and confidence in the credit default swap market will be shaken.
Greece’s bondholders aren’t the only ones unhappy about the bailouts, however. Germans have grown wary of their country’s role in Greece’s financial rescue, which has seen hundreds of billions in loans guaranteed by the German government. Although Germany stands to collect millions in interest on these loans, a Greek default would result in devastating losses for the eurozone’s largest lender—a scenario most Germans are eager to avoid. A recent poll showed 60 percent of Germans oppose lending any more money to Greece, and one German interior minister was quoted as saying Greece should be persuaded to give up the euro.
Greeks themselves have begun to protest the bailouts as well. In exchange for Germany’s aid, Greece has been forced to adopt severe austerity measures and higher taxes at a time of rampant unemployment, making a painful economic recession even worse for average citizens. Greek animosity toward Germany is so high that Greek publications are portraying German Chancellor Angela Merkel as Hitler. Such hostile communication is only adding fuel to an already smoldering fire.
Fortunately for now, these problems are mostly limited to the eurozone. Yet some speculate that the U.S. may not be far behind in sharing Europe’s troubles. Though the U.S. economy appears to be improving, it is being buoyed by deficit spending to the tune of $150 million an hour. Even more worrying are reports that the money is being used less than wisely. For instance, the federally funded Guantanamo Bay detention camp recently spent $750,000 to build a soccer field for detainees. If Europe were to collapse into an economic depression, the U.S. government would likely have to enact its own deeply unpopular austerity measures.