Eurozone: The End Is Nigh?

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The public debt crisis that has crippled the abilities of the Eurozone states to finance their budgets and led them into a recession, especially the southern European states, is evolving into a banking crisis with negative ramifications worldwide. There are quite a few trends emerging that indicate a shift of the debt crisis into a banking crisis that cannot be contained with orthodox measures and, should it occur, will spread across the entire globe, quite possibly wrecking development potentials for years to come.

Recently Moody's credit agency downgraded 16 Spanish banks. Over the past few months more than 100 billion euros have fled from the Spanish banking system via costumers afraid for their deposits. One of those banks, named "Bankia," has been practically insolvent and relies on state assistance, which means that the Spanish state should be able to find large sums of capital to refinance it, although it is already being forced to borrow money from the international markets with more than a 6.3 percent interest rate, and it is a step away from losing its ability to issue more bonds.

The important bank for the economy of Italy, Unicredit, has seen its share price decreasing considerably over the past few weeks, and an increasing number of its costumers are closing their accounts and transferring their money elsewhere. Moody's also downgraded 26 Italian banks and is considering downgrading 114 Eurozone banks in total in the coming period. The same trend has been emerging in Greece since 2010 with as much as 30 percent of bank deposits fleeing to safer destinations. Foreign investors are also moving their capital out of Portugal, despite the fact that local costumers are still calm.

The euro currency is losing value. Since January 2012 it has lost 12 percent against the dollar and 10 percent against the British pound, despite the sluggish growth and growing unemployment in the former and the technical recession in the latter. The Spanish, Portuguese, Italian and Greek economies are already experiencing considerable recession, and France and the Netherlands are not far behind. In short, with the exception of Germany the whole of the Eurozone is declining in production terms, posing great peril for the survival of the euro.

In political terms, the rise of extremist tendencies among the far Right and the far Left in the Eurozone is already developing. Italian security and intelligence services recently raised the alarm rate for new terrorist attacks by domestic groups and ordered the beef-up of security measures for 550 state officials and the tightening for protection of around 14,000 locations across the country.

Greece has elections on June 17, the second one after those of early May, and there are no safe estimations that a stable government can be formed. The term "Grexit," meaning the exit of Greece from the euro, is being widely used among world banks and insurance agencies. At the same time, Greek politicians are hinting that Athens may introduce a "euro-drachma" that would run in parallel with the official euro currency and be used to pay local salaries and pensions, making a half step of dropping the euro.

The price of consumer and industrial commodities is dropping, and world trade is slowing down, according to a recent CNBC report. The price of gold is increasing, and the international diamond market is experiencing good times—signs that suggestion the coming of a banking crisis that will see assets moved from paper to precious commodities on a grand scale. The real estate market in expensive residencies in London, Geneva, Frankfurt and Paris is also surging, further indicating the allocation of the so-called "smart money" to traditional investment sectors and away from the stock market and bonds.

The liabilities of the Eurozone banking system runs in trillions of euros, and banking institutions have been leveraged and spread across a multitude of financial products all over the globe. That simply means that if the Eurozone breaks up or a systemic banking crisis erupts in Europe, it will be by far more devastating than what happened to Lehman Brothers in September 2008, which had $85 billion in liabilities. The entire planet would experience a crash similar or even worse than that of 1929. In such a case, the political turmoil that would ensue—along with the proliferation of conflicts, ethnic animosities and revolts—would potentially bring about the most radical transformation of the established political order that the world has seen since the 1940s.

In the case of such a critical circumstances, policy makers would seek out desperate solutions, sacrificing less valuable parts of the system for the survival of the rest, implementing massive debt relief programs and considerable changes in political management practices in the Eurozone as well as globally.

View the Worldpress Desk’s profile for Ioannis Michaletos.