Eurozone Crisis: A Long Hangover or ‘Credit Crunch’ II?

The current crisis in the Eurozone has sparked international panic across world financial markets. The FTSE 100 almost opened and was almost immediately down 3%. Though the crisis has a different basis to that of 2008 (the fear of default by some of the Eurozone’s major nations, rather than sub-prime banking crisis) many are seeing similarities between now and four years ago. This comparison then brings the question, are we heading for another major financial crisis like we saw in 2008?

The spark for this latest crisis in the financial markets was caused by European President Barroso’s comments that the EU‘s response to the European government debt crisis was not confined to the Euro periphery area, giving the impression that Spain and Italy were also about to be engulfed by the debt crisis. Both Spain and Italy play major roles in the politics and economics of the EU. If it were thought that there was a possibility of default in these two major EU, it could be possible for unstoppable contagion of the crisis to set in across Eurozone indebted countries.

However, it is important to note that, unlike the 2008 crisis, the markets have known for quite some time about the high levels of debt throughout the Eurozone, making the shock impact lesser than that in 2007. And this afternoon the markets did show signs of willingness to bounce back. Figures released in Washington showed that the US economy had created more jobs that had been expected, reducing the rate of unemployment by 0.1%. This piece of good news caused a small rise in European market, while the Dow Jones (US) opened up on the previous day’s trading.

Therefore, it is clear that this is not an identical situation as occurred three years ago. In fact, to an extent, it is possible to see this a continuation or after effects of the previous financial crisis. After all, the credit crunch is part of the reason countries like Britain, Ireland and Spain are struggling with budget deficits.

And it may well continue further, with various investors foreseeing no end to the current financial turmoil until there is a convincing solution from the European Central Bank to guarantee EU government bonds and stabilise the balance sheets across the Eurozone. A deal to solve this crisis may well go as far as a collective Eurozone wide guarantee on indebted government’s bond issued.

It does not seem (yet) that we are entering a new credit crunch and potentially and double dip recession. Partly because this is a continuation and the legacy of the previous financial crisis, but also the US market has found some resilience from US employment figures.

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