The European Soveirgn Debt Crisis Essay

3712 words - 15 pages

December 10, 2012
The European Sovereign-debt Crisis
Throughout history, debt has been an issue and a concern for many countries around the world. Nations borrowing money, unnecessarily spending, corruption, inability to pay back loans and a variety of other factors have contributed to the devastating and lasting effects of monetary absolution. In recent years, some of the most significant and devastating economic occurrences that have taken place were released to the general public. One that has received a great deal of attention is known as the European Sovereign- debt Crisis or the Euro zone crisis. The European Sovereign Debt crisis is an ongoing financial crisis that has made it ...view middle of the document...

Causes of the crisis varied by country. In several countries, private debts arising from a property bubble were transferred to sovereign debt as a result of banking system bailouts and government responses to the slowing economies post-bubble (Wikimedia). In addition to the creation of the European Union the European nations established a monetary union that too would generate a problem during the transition from weaker currencies to the stronger Euro. This was especially the case because there was no fiscal Union or different tax and public pension rules that greatly contributed to the crisis. Some of the other factors contributing included the globalization of finance; easy credit conditions during the 2002–2008 period that encouraged high-risk lending and borrowing practices; the 2007–2012 global financial crisis; international trade imbalances; real-estate bubbles that have since burst; the 2008–2012 global recession; fiscal policy choices related to government revenues and expenses; and approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses (Wikimedia). All of these factors and others put the European Union and every member country at serious risks for losses. The interconnection in the global financial system would mean that if one nation defaults on its debt or ends up in a recession then the banking systems of creditor nations also face losses. The concern for Greece defaulting on its debt became all too real as of 2011 and measures had to be taken by other members of the European Union to assist. Greece along with Ireland and Portugal were the most affected by this crisis and yet alone only make up approximately 6% of the European GDP (Wikimedia). Germany accounts for most of the European GDP and is upset that it has to support countries such as Greece. Fourteen out of 27 countries in the European Union had public debt exceeding 60% of their gross domestic product at the end of 2010, according to official statistics (CNN).
One of the country’s that was hit the hardest by the Euro zone debt crisis and a major contributor was Greece. The Greek debt crisis was not one that occurred overnight, but is one that occurred over a long period of time driven by a multitude of factors. The early to mid 2000’s in Greece were considered the good years in which the country had one of the fastest growing economies. At the time this was just a mask that Greece had put on and appearances would soon prove to have been deceiving. The country hosted the 2004 Olympic Games with loans borrowed which also contributed to its structural debt. The main industries in Greece are the tourism and shipping which are extremely cyclical and sensitive to the business cycle. As a result the government was spending heavily to keep the economy running but it too added to the debt (Bloomberg LLP). In Greece, unsustainable public sector wages and pension commitments drove the debt...

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