Section I: Group Report
1.0 Problems or Causes of Europe’s Debt Crisis
European debt crisis is known as financial crisis for several European countries which experience in collapsed of financial institution and high government debt that the several countries unable to pay the debts it has built up in recent decades. The Eurozone member states includes of Greece, Portugal, Ireland, Italy, and Spain. The European debt crisis arise in year 2009 which the several countries has meet difficulty in repay or refinance their government debt without assistance of third party like European Central bank.
One of the cause of European debt crisis is including the subprime crisis and the Great Recession (2008-2012). The economy is experiencing slow growth globally since the subprime crisis and the Great Recession (2008-2012) and it has revealed the untenable countries’ fiscal policies in Europe and all around the world. Monetary policy versus fiscal policy has been one of the causes for European debt crisis. The European debt crisis arise due to unsustainable fiscal policies of the countries. In year 2009, George Papandreou, Greek the new Prime Minister has announced that previous governments had failed to reveal the true size of the nation’s deficits. The debts were actually larger than it had been reported. The deficit levels is higher than what it expected that cause investor loss of confidence lead to bond spreads to rise to unsustainable levels. Due to the excessive sovereign debt, lenders requested higher interest rates from eurozone states with high debt and deficit levels. It make harder for these countries to finance their budget deficits when it experiencing overall low economic growth. The higher the demand for yield which mean higher borrowing costs for the country in crisis, which leads to further fiscal strain, prompting investors to demand even higher yields, and so on. Therefore, a general loss of investor confidence would typically affect not just the country in question, but also other countries with similarly weak finances.
Slowly, the public debts of European countries such as Portuguese, Spanish and Italian also became a matter of concern because their government debt or GDP ratios were almost same as the Greek one. The European sovereign debt crisis had started. There were no penalties for countries that violated the debt-to-GDP ratios. It is one of the reasons cause the European debt crisis. Debt-to-GDP ratios is to compare a country’s sovereign debt to its total economic output for the year which the output is calculated by gross domestic product (GDP). These ratios were set by the EU’s founding Maastricht Criteria. The member of European Union has signed the Maastricht treaty which they pledge to limit the deficit spending and debts level. However, there is few number states which including Greece and Italy fail to follow and bypass the rules and ignore the international agreed standards. The debt-to-GDP ratio was set by the European Union under the Convergence Criteria which stated that a government debt shall not more than 60% of the nation’s GDP and the government deficit should not exceed 3% of the nation’s GDP. France and Germany has spending over the limit even they were the leading countries. There is no any punishment except expulsion from the eurozone. However, this punishment would weaken the power of the euro itself.
It cause the sovereigns to have the chance to hide the true deficits and debts level through a combination of techniques as well as the use of complex currency and credit derivatives structures. There is many Eurozone countries of different credit worthiness receive the similar and low interest rate for their bonds due to the adoption of euro. As a result, creditors in countries with originally weak currencies and higher interest rates suddenly enjoyed much more favorable credit terms, which spurred private and government spending and led to an economic boom. In some countries such as Ireland and Spain low interest rates also led to a housing bubble, which burst at the height of the financial crisis.
Besides, some affected countries raised taxes and slashed expenditures to combat the crisis, which contributed to social upset within their borders and a crisis of confidence in leadership, particularly in Greece. During this crisis, several of these countries including Greece, Portugal, and Ireland had their sovereign debt downgraded to junk status by international credit rating agencies, worsening investor fears.
Section I: Group Report