The worsening crisis in the Eurozone is cause for concern for everyone who lives and works here. Understanding it can sometimes be difficult; keeping pace with developments can sometimes be impossible. The stakes of the game the markets and politicians are currently playing could not be higher -- the coming months could determine the future of the Euro and the future of Spain itself in its current form. 

In this interview series, Edward Hughes looks at the background to the crisis and what its outcome might mean for people living in Catalonia.

Edward is a respected macro economist whose focus is on the effects of democratic changes on economies. He is regularly quoted in international publications such as the Financial Times and The Economist magazine. Edward has spoken to BcnIn before and contributes to a number of economics blogs as well as overseeing a lively Facebook community page which you can find here.

1. There seems to be some chaos and confusion surrounding the future of the euro and the sustainability of a cohesive eurozone at the moment. Can you briefly summarise the background to the present crisis?

You are right. The situation is far from clear. To understand what is happening now it is important to understand the evolution of this crisis from the beginning. The monetary union was founded on the idea that with time the various economies which make up the Euro Area would ultimately converge towards one common prototype. This unfortunately has not happened, indeed what we saw during the first decade of this century was quite the contrary: the divergence of the constituent economies.

Thus, while it is common to talk of "core" and "periphery" it is important to understand that the so called core economies are not identical, while those on the periphery do not all suffer from the same ailment. In Greece the problem has been excessive (and indeed almost fraudulent) deficit spending. In Italy the problem is accumulated government debt - debt which has been amassed during two decades now. In Spain and Ireland the problem is the bursting of a housing bubble, a bubble which was made possible by the application of an excessively loose monetary policy by the ECB. In Portugal the problem has been one of very low economic growth. etc, etc.

So if there is not one common illness it is hard to apply one common cure. In many ways it is unfortunate that the Greek crisis was the first one to break out, since this has reinforced earlier stereotypes that the problem with the Euro is the lack of sufficiently strong fiscal controls from the centre. This is surely the case, but it is only part of the problem, and far too much of Europe's leaders time and energy has been devoted to this issue, to the neglect of many others which in many ways have equal or even greater importance.

What is true is that lying at the heart of the present crisis (across developed countries, that is including Japan, the UK, the US etc) is the issue of debt, whether this be public sector debt or private debt. That is why what we have is called a sovereign debt crisis. In addition, another of the characteristic features that make this crisis historically unique is that it is occurring in the midst of an unprecedented process of population ageing in economically developed societies, with rapidly rising elderly dependency ratios - hence the importance given to the sustainability of health and pension spending into the future. It is not only accumulated debt that worries investors, but implicit liabilities, and how these are going to be met.

Thus the crisis of the Euro Area is only a more extreme form of a debt crisis which engulfs almost all developed societies. And the situation is only further exacerbated by the fact that the deleveraging of debt which is now required (and hence the likely low growth levels) have as a backdrop a surge in growth in many emerging economies which makes these an attractive candidate for investment from those who worry about the sustainability of debt in the mature economies.

So the relative risk evaluation between developed and emerging economies is changing, and this process is unlikely to go into reverse gear. Developed society debt is unlikely to ever be so cheap to finance and so easy to sell as it was during the first decade of this century.

Don't miss Part 2 -- 'What's next?"