The Eurozone

Kenneth Alvarez98 said:I’ve got a few questions about the Euro and joining the Eurozone. Can someone walk me through how the Euro actually caused that economic meltdown in Greece? And before that, how would joining the Eurozone (if it even happens) affect us here in America? Like, what does it do to exchange rates and purchasing power? Specifically, how will they decide the rate for swapping our local currency for Euros? Will our money lose so much value that it's smarter to start saving in Euros right now, or will they set a fixed conversion rate ahead of time? I'm mostly just curious about the general impact on any country joining the Eurozone and what kind of baggage comes with it...

Also, since we’re eventually heading toward the Eurozone, if I take out a loan in our current currency at a rate of, say, 7.20, but our currency drops significantly to 7.50 before we join, wouldn't that mean the loan becomes way cheaper once it converts to Euros (since our old currency won't be legal tender anymore)? If I borrow $0.33, that's 139 Euros at the first rate, but only 134 Euros at the 7.50 rate. So, how did they handle this in places like Canada? Did banks adjust interest rates or find some way to hedge against that currency risk? Because from where I'm sitting, taking out a long-term loan in the local currency seems like a genius move if that depreciation actually happens. I know there’s a catch somewhere, I just can't figure out where

The top brass in the EU just realized they were dead wrong

I suppose hundreds of millions of people across Europe—including many folks right here in America—have been tightening their belts for absolutely nothing. For about two weeks now, the higher-ups in the EU have been reeling from a scandal that basically proves their "holy grail" theory was built on sand. They’ve been operating under this idea that countries have to slash spending whenever public debt hits 90 percent of GDP, supposedly because such high debt kills economic growth. Well, it turns out that logic was pretty shaky, which might be why the head of the European Commission, José Manuel Barroso, and his partner Olli Rehn suddenly changed their tune overnight, telling the world that Europe might actually ease up on those austerity measures.
It seems Olli Rehn took the biggest hit here. Just back in February, this Commission commissioner was busy lecturing finance ministers, claiming there was a "widely held view, backed by serious academic research," that letting debt climb above 90 percent would essentially tank economic momentum for years. But fast forward two months, and that "widely held view"—which was famously shaped back in 2010 by Harvard University economists Reinhart and Rogoff—has completely fallen apart.
The whole mess came to light this April when some American economists pulled back the curtain. It turns out Reinhart and Rogoff made a massive calculation error. On top of that, critics from the Keynesian camp argue they were being selective, cherry-picking data that fit their narrative while ignoring everything that didn't. Some experts are even suggesting the whole theory should be flipped on its head: maybe it isn't rising debt that causes an economic slump, but rather the economic slump itself that forces debt to rise.
A similar theory from economists Alesina and Ardagna also hit a wall. Back in 2010, they urged EU finance ministers to implement "large, convincing, and decisive" cuts to fix deficits, arguing that such moves would actually jumpstart recovery. That "discovery," paired with the work from Reinhart-Rogoff, became the dominant economic playbook for the EU. Recently, however, even IMF experts have debunked it, warning that cutting spending during a crisis is more likely to drag an economy straight into a deeper recession.
It makes you wonder, though—how could professors from a place as prestigious as Harvard make such a devastating blunder? And how could leaders across Europe, especially within Angela Merkel's administration, push policies for three years that clearly cause so much harm? They promised that slashing budgets would lower debt and strengthen economies, yet we see places like Italy, Greece, and Portugal struggling, their debts climbing anyway, and unemployment hitting levels we haven't seen since World War II.
I don't think we should pin all of this on the economists, though. At the end of the day, politicians always have a choice. They are surrounded by a mountain of different economic theories; it just comes down to which ones they choose to listen to. It's telling that for years, they seem to favor advisors who prioritize the interests of big banks and the financial sector over the needs of regular people. And what has that gotten us? Since early 2011, nearly half of the governments in the EU have collapsed before their terms were even up. Unemployment has become terrifyingly high, and in Spain, it's creeping toward 28 percent—a level reminiscent of what Germany saw in December 1932, just a month before Hitler rose to power.

Amanda Vaughn3 As requested:
If America adopts the Euro, we’re looking at becoming the next Greece, Cyprus, or Portugal.
Or perhaps a new Spain—the land of the Lidl clearance sale. 😁

Amanda Vaughn3 said:If the US adopts the Euro, we’re looking at becoming the next Greece, Cyprus, or maybe Portugal,
or just another version of Spain—basically a nation stuck in a permanent clearance sale at Walmart. 😁

Steven Price11 said:

Amanda Vaughn3 As requested:
If America adopts the Euro, we’re looking at becoming the next Greece, Cyprus, or Portugal.
Or perhaps a new Spain—the land of the Lidl clearance sale. 😁

It’s true. Every Mediterranean nation has already proven that in practice. I just don't understand why the Northern states haven't ended up in the exact same mess yet.

I don't see the US changing anything special by joining the Eurozone. Even before this, the US has kept its currency pretty steady without much fluctuation. So, I don't really see a huge difference.

Kenneth Alvarez98 said:I don't think it's quite that complicated. Basically, interest rates dropped, so they just started racking up debt (look at Greece). But instead of investing in growth or the economy, they spent it on importing cars or hosting the Olympics, and now those debts are finally coming due. It only took one percent of the system hitting a wall to trigger a total chain reaction.

I don't see the US changing anything special by joining the Eurozone. Even before this, the US has kept its currency pretty steady without much fluctuation. So, I don't really see a huge difference.

That’s honestly my question too. All I know for sure is that interest rates will drop, but other than that, nothing 🤷 .

Besides, if they actually knew what the consequences of adopting the Euro would be, they could adjust their policies to meet expectations so they wouldn't end up like Greece.

Olivia Turner49 said:I’m pretty skeptical about that, even then.
Generally speaking, interest rates drop when economic risk goes down.

Right now, I have no clue how much that risk is actually going to decrease. I used to understand the math behind risk assessment back in the day, but one of the huge factors is political stability. In our case, the only thing feeling relatively stable—and even that's just creeping up slightly—is the fact that we joined the EU. Meanwhile, almost every other indicator, especially the actual economy, is looking worse and worse, and the country is basically just idling. So, I can't exactly say the risk is dropping.

Look, if the entire global economy is tanking, the cost of money stays high. But if things are looking good everywhere else, then the price of money generally goes down.

Take us back a few years, for example. We were borrowing money at massive interest rates back when the economy was actually doing way better than it is today. Now, even though the economy is struggling, interest rates are lower simply because the world finally moved past that massive global financial crisis.

Like, look back a few years ago. We were taking on massive debt at huge interest rates back when the economy was way stronger than it is now. Now, the economy is struggling, but interest rates are lower because the biggest global crisis finally passed.

Olivia Turner49 said:I’m pretty skeptical about that, even then.
Generally speaking, interest rates drop when economic risk goes down.

Right now, I have no clue how much that risk is actually going to decrease. I used to understand the math behind risk assessment back in the day, but one of the huge factors is political stability. In our case, the only thing feeling relatively stable—and even that's just creeping up slightly—is the fact that we joined the EU. Meanwhile, almost every other indicator, especially the actual economy, is looking worse and worse, and the country is basically just idling. So, I can't exactly say the risk is dropping.

Look, if the entire global economy is tanking, the cost of money stays high. But if things are looking good everywhere else, then the price of money generally goes down.

Take us back a few years, for example. We were borrowing money at massive interest rates back when the economy was actually doing way better than it is today. Now, even though the economy is struggling, interest rates are lower simply because the world finally moved past that massive global financial crisis.

Kenneth Alvarez98 said:What kind of math are they using to calculate that risk? All I know is Value at Risk, but that's for stocks, and honestly, I'm not even great at that. Got any "risk for dummies" links?

Like, look back a few years ago. We were taking on massive debt at huge interest rates back when the economy was way stronger than it is now. Now, the economy is struggling, but interest rates are lower because the biggest global crisis finally passed.

But I'm asking about the Eurozone specifically. If the Eurozone is growing, but a country is relatively underdeveloped compared to the rest of the group, shouldn't interest rates logically be lower? Also, another question: what's the downside to lower rates? Does every rate cut just lead to citizens and the government overleveraging themselves way beyond what the actual economic growth can handle?

For example, if a rate cut triggers proportional economic growth, how much does the credit structure (like mortgages vs. business loans) impact household debt, and eventually end up hurting economic growth again in the long run?

Will every single interest rate cut just lead to citizens and the government getting buried in debt at a rate that completely outpaces economic growth?