London Bridge is falling down. The rhyme we learnt in school as children now applies to numerous countries in Europe. With debts rising and economies crashing the Eurozone is facing a financial crisis that could have serious repercussions around the globe. As the European Union scrambles to make amends to prevent complete catastrophe, the world waits and watches.
The crisis, widely known as the Eurozone debt crisis involves numerous European countries, Italy and Greece being the biggest players. The Euro was introduced as a currency in Europe in the year 1999. European Union members UK, Sweden and Denmark declined to adopt the currency at this point. Later, more countries started adopting the currency and Greece joined the bandwagon in 2001. The concerns about the increasing budget deficits i.e. the difference between earnings and expenses in the Eurozone countries first began arising in 2009.
France, Greece, Spain and the Irish Republic were asked to look into their deficits. During the Dubai sovereign debt crisis, more questions were being asked about the creditworthiness of various EU countries. In December of the same year, Greece announced that its debt had touched 300 billion Euros or to put it another way, the debt had reached 113% of the GDP.
The year 2010 saw Greece coming under the scanner for its huge debt irregularities. Its budget deficit was increased to 12.7% and then in the month of February, the country adopted a series of austerity measures in an attempt to curb its debts and spending. At the same time, concern started growing about other debt-ridden countries namely Portugal, Ireland and Spain.
In mid-2010, with public protests over the austerity measures and Greece’s borrowings increasing even more, the Eurozone members and the International Monetary Fund agreed on a bailout package for the country. The Irish republic was next in line for a bailout.
Portugal in the 2011 finally asked for help to deal with its financial woes when repeated cuts and austerity measures did not help. The Eurozone then came up with a 78 billion Euro bailout package for Portugal. Talks then began of Greece becoming the first country to be removed from the Eurozone in light of its debts and borrowing.
Under threat, the Greek government began a new round of austerity measures and the Eurozone began planning a second bailout package. Spain and Italy became the next two dominoes in the crisis and as their borrowing started to rise, investors began asking for higher rates of return on investment. The government began austerity drives and announcements of the slowdown of economic growth in the Eurozone started doing the rounds.
In September 2011 as panic continued to rise and allegations of the EU’s incompetence flew around, Italy was downgraded from an A+ to an A rating by credit rating agency, Standard and Poor’s. September and October the saw the IMF’s gloomy forecasts of a drop in the growth rates and data showing that the Eurozone’s private sector had shrunk.
Things swung into high gear in October 2011 when IMF President Christine Lagarde urged countries to act swiftly to pull themselves back on track. UK PM David Cameron added his bit when he urged swift action to prevent the crisis from escalating. Talks and debates went back and forth about the viability of bailing out the debt-stricken countries and the measures to prevent the crisis from getting bigger.
On the 26th of October, a final decision was reached about giving Greece a bailout package which would all but save it from defaulting on its loans. There was also a decision reached about a ‘three-pronged approach’ to solving the crisis including a move for private banks to accept a loss and to increase capital. Italy has been pitched as a key to the plan’s success. The buying and selling of bonds has shown that markets are shaky and investors lack faith in the plan.
The crisis seems to have boiled down but it still remains to be seen whether it has completely abated.
Ayesha Sruti Ahmed