Problems in the Eurozone
Recently there has been a lot of talk about the current economic situations in Greece and Italy. Greece has driven itself into a great deal of debt and has had much turmoil throughout the past year. Their problems were created by uncontrolled spending and borrowing from other nations. As seen in the Firstpost Economy article the country has managed to rack up about 30,910 Euros for every person in the country (about 11 million people) in debt total. They have tried to resolve their woes with taxes and other revenue, but simply cannot make up for the debt. Serious problems would start to occur if Greece defaults on all of its debts. If this happens many banks across Europe will be hurt severely and Greece would mostly likely back out of the euro. A Greek downfall would also most certainly lead to the economic collapse of other not so stable European economies, such as Italy, Portugal and Ireland. Over the past month things have begun to look a bit better for Greece as a unity government has emerged there, but in Italy it’s an entirely different story.
Italy’s financial situation is now what many people are worrying about. The Mail Online article I have cited is in fact called “Why Italy is the new Greece.” Italy is a larger player than Greece in the Eurozone, having the third largest economy in this seventeen-member group. Italy’s debt is now an absurd 121% of its gross domestic product. Hopefully plans for an International Monetary Fund safety net by G20 will help to avoid scary situations like this is the future. If Italy defaults on its debt the immediate consequences would be significantly worse than what a financial crisis in Greece would create.
Though all of this news sounds like it could cause a real mess, it is also all speculation. It is not exactly known what will happen to Greece or Italy, but people always assume the worst. This is where the idea of information cascades comes into play. Once people hear that the economic situation in Greece isn’t good people in Greece and other countries in Europe may start to make financial decisions based on this information. Then with the addition of the news about Italy more people in Europe start selling stock and making other changes to their financial profiles. Eventually the entire European market is affected, which in turn affects markets around the world. As the Wall Street Journal article states, US stocks fell this morning based on the news from Europe. This is all because of speculation of what may happen in two countries. The stock markets in the US and around the globe are all almost completely based on information cascades. People only make decisions on whether or not to buy or sell stocks based on decisions other people make, which could be based on information they heard from any source, reliable or otherwise. In this specific situation information traveled quickly around the world and ended up making significant changes in places the information didn’t even originate. Both the US and European markets today may have closed higher or lower than yesterday, but however they ended up you can bet that tomorrow the quick spread of more information will greatly affect the markets yet again.
http://online.wsj.com/article/BT-CO-20111107-709672.html