The Trouble with Asking Weak Economies to Leave the Euro - dummies

The Trouble with Asking Weak Economies to Leave the Euro

By Julian Knight

The debate over whether Greece in particular but also the other countries in particular debt crisis (Portugal, Ireland, and Spain) should leave the Euro has been raging for the past year or so and this creates uncertainty. Markets hate uncertainty and as a result have started to look at the government debt of other stronger members of the Euro. Because of this, international investors in the debt of these countries are now asking for a higher rate of interest — which is making it more expensive to borrow — which damages government finances and economic growth. The big danger is that the economic crisis in the countries mentioned above is now spreading across the Eurozone, which may mean that the single currency fragments as nations re-adopt their old currencies in order to devalue.

It’s not just Portugal, Ireland, Greece, and Spain that are in trouble. According to many observers, several other Eurozone nations have over-borrowed and may have difficulty keeping up with their debt repayments. These include Italy — and even the world’s fifth largest economy — France.

Confidence is crucial to the international markets on which national debt is sold. If investors have doubts that they will get their money back, they will ask for a higher rate of interest or simply refuse to invest.