1. Why did the European Commission bail out banks in Ireland and Greece? Why not let them default?
2. Investors demanded that Portugal€™s José Sócrates and other leaders make big spending cuts. However, Sócrates and other socialist prime ministers would prefer to generate economic growth via government spending. Which approach is likely to be most effective?
3. Why do citizens in France, Great Britain, and elsewhere stage protests when the government imposes austerity measures?
4. As this edition went to press in mid-2015, concern was mounting that Greece would drop the euro. What has happened since then? Is Greek still using the euro?

How do you fix one, two, or several broken economies? More specifically, how do you keep the euro zone intact? During the summer of 2012, Mario Draghi, the president of the European Central Bank (ECB), had an answer: €œWithin our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.€ With those words, Draghi declared that he intended to keep the euro zone from falling apart.
Following strong growth in the early years of the twenty-first century, the good times ended as one EU economy after another fell victim to the global economic crisis. At the heart of the problem was the fact that during the boom years, several countries had run up huge current account deficits. Governments were then obliged to borrow money to offset the deficits (see Exhibit 3-11).

Exhibit 3-11

In 2010, two years after the collapse of Lehman Brothers, Europe experienced a banking crisis of its own. Property values slumped€”in other words, the so-called asset bubble burst and the banks that had provided the financing faced a cash crunch. As governments intervened to keep banks from failing, they piled up debt. Global investors in New York, London, and elsewhere worried that governments would default on their debt obligations.
In the twentieth century, when each European country had its own currency, government leaders could manipulate exchange rates by using devaluation. As you read in Chapter 2, a weaker currency has the effect of making exports more competitive. This, in turn, stimulates the economy. Everything changed in Europe a decade ago when a currency union was created. To date, 19 EU members have adopted the euro. For them, devaluation is no longer an option.
Despite being members of Europe€™s single market, EU nations vary widely in terms of trading patterns and economic strength. To the north, Germany is Europe€™s largest economy. An export powerhouse, Germany€™s annual GDP exceeds $3.7 trillion, and its overall annual trade surplus is about $200 billion. German companies enjoy high productivity and are strong competitors in global markets. In the north, labor markets are relatively flexible, and employees typically exhibit strong work ethics. As a general rule, companies in the south are less competitive, and government labor regulations make it hard to lay off workers. European countries also vary widely in their taxing and spending policies. The German people have a reputation for thriftiness. By contrast, Greece and its Southern European neighbors have reputations as being big spenders.

Greece, for example, exports very little, and its economy is only one-tenth the size of Germany€™s. But Greece is not the only European country that is in crisis. Ireland, Spain, Italy, and Portugal are also at risk. As one Portuguese businessman put it, €œThe euro€™s great if you€™re traveling around, but it€™s an absurd idea to have the same currency in a country like Greece or Portugal as in Germany, which has totally different habits and culture.€

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