Euro Crisis

  • SumoMe

Introduction

Just when the world was recovering from the anxiety of the 2008 Global Recession and was coming to terms with the normal routine, another uncertainty started looming over in the form of the Euro Crisis. Euro zone being plagued by the sovereign debt crisis can have disastrous implications on the US economy leading to a double dip recession. The sharp increase in government debts, downgraded credit ratings amid fear of defaults and the inadequacy of the bailout packages has led Greece and many other Euro countries into the danger zone. Now will they be able to recover from this disaster and will the economy be able to sustain itself?

End of one disaster, start of another

The worst hit country in the Euro crisis, Greece, had a very stable economy till late 2000. There after the government started making expenditures and the country’s debt began to pile up exponentially. Its shipping and tourism industry took a setback in 2008 when banks stopped lending and people’s purchasing power dropped down majorly. Ireland on the other hand was deeply hit by the property bubble during recession in 2008. Even after extending their repayment period thrice it could not repay its debts during the property bubble. It was in 2010 that the situation gravened when concerns started building upon the rising debt of the Euro countries. Countries like Italy and Portugal also moved into the danger zone by excessive expenditure of their respective governments. The accumulated debt as a result accounted to the large amount of sovereign debt leading to the present financial crisis in Europe. As the situation worsened, International Monetary Fund (IMF) came into action, temporarily saving these sinking ships with bailout packages worth €110 billion for Greece, €85 billion for Ireland and €78 billion for Portugal. The credit rating agency Standard and Poor’s, after being targeted during the 2008 crisis for being too easy on credit ratings, has been strict this time and downgraded Greece’s sovereign debt rating to CCC in June 2011, the lowest in the world. In May 2010, the Finance Ministers from the Euro countries had formulated the European Financial Stability Facility (EFSF), a rescue package worth €750 billion to ensure financial stability in Europe. The major contributors towards this fund were Germany and France who were unaffected by the crisis. But looking at continuous downgrading performance of Greece, they too have become helpless.

Role of different Euro Nations

Greece, with a public debt of 142% of its GDP, is worst hit by the current Euro crisis. Other countries which follow league are Ireland, Italy, Spain, Portugal and Belgium. Countries like U.K and Iceland though not much affected by the crisis, any disruption in banking markets might have a spillover effect on these countries as well. The affected nations have taken a cue from the rising uproar and have started taking austerity measures through spending cuts and tax increases. This has led to wide spread public protest in the form of nationwide strikes in Athens, Greece. Only countries standing strong are Germany and France who are extending support to the endangered nations in the form of credit and guarantee where ever required. Reasons for this support being, one because of their obligation to help their member nations and other more important fact being that if these nations default then Germany and France will also be affected since most of their lending is from German and French banks.

Current state

In spite of the increased cuts, the situation in Greece hasn’t improved much. Looking at the gloomy picture, in late October 2011 the leaders of the Eurozone countries came up with the Brussels agreement to ease the under pressure nations. Following are few of its main points:

  1. Write off 50% of Greek sovereign debt
  2. Increase EFSF fund to €1 trillion
  3. Mandatory level of 9% for bank capitalization
  4. Commitment from Italy to reduce national debt

This has led to revolts from the opposition in respective governments, considering the austerity measures being imposed on the nations. But if all the member nations manage to stick to the agreement, then Europe might be able to stabilize its economy.

Global Implications

In case Greece defaults, it might lead to a recession in Europe. Germany and France being the main borrowers from Greece and Portugal, they will be deeply affected in case of default. Europe being a major market for American exports, a recession in Europe is likely to spread to US too, and from US to the rest of the world. With current double dippy state of US, added pressure from Europe will only make the matters worse for it. Thus what we are calling a Euro crisis, if not handled, can turn into a full-fledged world crisis.

Proposed solutions

Even after the spending cuts, situation is sensitive in Europe. Though the Brussels agreement has shown some light but it is only a short term solution. Considering the difference in the level of capital in countries like Germany and Italy, such kind of imbalances will always lead toa situation similar to the current situation.. To resolve this, economists have suggested the disintegration of the Eurozone. One suggestion is that countries like Greece and Italy be separated from the Eurozone and their currency be devalued. Once their situation improves, then they can be integrated back into the Eurozone. Another drastically opposite suggestion is that Germany be separated from the Eurozone and reintroduction of the Deutschmark which used to prevail earlier. Though none of the solutions is near to getting  implemented, but considering the possible implications of the Euro crisis, they don’t look that distant as well.

Swati Nidiganti

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