EUROPEAN DEBT CRISIS – ORIGIN, CONSEQUENCES AND POTENTIAL SOLUTIONS
F RA N TI Š E K N E M E T H
Abstract What is the European debt crisis? As the head of the Bank of England referred to it in October 2011, it is “the most serious financial crisis at least since the 1930s, if not ever.”1 In fact, the European debt crisis is the shorthand term for the region’s struggle to pay the debts it has built up in recent decades. Five of the region’s countries – Greece, Portugal, Ireland, Italy, and Spain – have, to varying degrees, failed to generate enough economic growth to make their ability to pay back bondholders the guarantee it’s intended to be. Although these five were seen as being the ...view middle of the document...
resistance to the austerity measures and a contracting economy has made it extremely difficult for Greece to clamber its way out of its financial problems. The unsuccessful effort to stabilize Greece’s economy, concluding with other dramatic all-night meetings of European leaders, provided the catalyst for the spread and intensification of Europe’s sovereign-debt crisis. Since then, the crisis has spread rapidly to Italy, Spain, and, most recently, France. The specific measures put forward, unintentionally underscored the systemic nature of Europe’s crisis. Once the scope of the resources and measures required only to contain the crisis to Greece were laid out, it became painfully clear, as The Economist noted in its October 29 issue, that European treasuries do not have adequate resources, “both to guarantee outstanding debt and maintain their own credit ratings.”2 In other words, the more France and Germany commit to loan weaker European countries like Greece, Italy, and Spain, the less credit worthy they become. Deterioration of France’s creditworthiness has already boosted its borrowing costs in recent weeks and has caused it to join those advocating more bonds buying by the European Central Bank (ECB). The European sovereign-debt crisis has intensified and grown rapidly over the last months of 2011. Since then, the crisis has spread rapidly to Italy, Spain, and, most recently, France. Europe is now battling an acute systemic debt crisis that threatens the global financial system and the global economy. This worsening crisis constitutes the largest single threat to the global economy and its financial system.
How did the Eurozone get here
The seeds of Europe debt crisis which the world is facing today were sown way back in 1999 when the proposal for common currency ‘Euro’ for the trade benefit and inclusive economic growth of the entire Europe was implemented. Greece entered the Eurozone in October 2000 based on its economic compatible condition although even then Greece had a high budget deficit and it is still blamed for under reporting its critical figures in order to get in the Eurozone. In late 2000 due to financial crisis the Greece largest industries, tourism and shipping, were badly affected. The Greece had joined the group knowing that it would be easier for it to get the debt with a globally strong currency Euro. The Greeks continued lavish spending (events like Athens Olympic which are reported to cost Greece several times more than the estimated cost, public care) combined with long following trade deficits and large tax evading population lead the Greece budget deficit and public debt to rise to insurmountable amount. And now, the deficit percentage and the debt to GDP ratio for the Greece are highest among
all the European States....