The European Sovereign Debt Crisis

Thesis: Broadly speaking, the debt crisis facing the US and the international community is an issue that has far reaching implications not only for financial institutions but also to many working people and many economists are giving top priority in solving this issue.

The weekend of May 5-6 opened a new chapter in the Eurozone debt crisis as voters in France and Greece voiced their disproval over current leadership. With news of France's Sarkozy losing the presidency, and "a dismal election result for Greece's pro-bailout parties" (Reuters.com. May 7, 2012. PP. 1); the future of the Eurozone continues to be shrouded in uncertainty. Debt yields for Greece, Ireland, and Portugal spiked as bond investors ruminated over fiscal and monetary policies. Likewise in Spain, the ten year bond pushed closer to the "psychologically important 6 percent" (Reuters.com. May 7, 2012. PP. 1) threshold. These events highlight the troubling issues of austerity, growth, and debt service which are weighing down the European economy, and as a result imperil the global economic growth story.

From the Financial crisis that struck the United States in 2008, to the world economic crisis and currently the European debt and sovereign crisis, the snowball is growing each day as the whole world's economy is heading towards the rock bottom. This project tackles the issue and the causes of the European debt crisis and its consequences on the euro currency and on the international financial markets. It also focuses on examining the austerity measures and policies taken by European governments to bail their countries out of the turmoil, and finally it tenders solutions that could be undertaken by governments to face or unravel such

The Global Financial Crisis revealed many flaws in the institutional framework of the Eurozone, as well as the flaws in the policies implemented in the aftermath of the revelation of the crisis. One of the major flaws revealed in the institutional arrangement of the Eurozone project, is the clause in the Maastricht Treaty which limits the ceiling on the ratio of the annual government deficit to gross domestic product. As a result of the Global Financial Crisis, The Maastricht Treaty put into place structural impediments that prevented member states from implementing counter-cyclical policies. It is likely that the crisis left a deep and long-lasting effect on economic performance and overall social hardship. Job losses were contained for some

By the end of 2008, the European Union began experiencing rippling effects of the United States financial crisis. Several member countries, most notably on the southern end of the continent, faced high levels of debt and unemployment. Portugal, Iceland, Ireland, Greece, and Spain, derogatively referred to as “PIIGS,” required extensive economic support from the EU in order to repay government debts and bail-out private banks. Disbursal of aid in 2010 proved successful in promoting economic recovery in some countries; however, the vast majority observed only slight economic improvement which led to doubts regarding the effectiveness of the harsh austerity measures implemented. Ireland has most clearly benefited from the financial support of the European Union as the country’s unemployment rate has dropped below ten percent and is expected to witness 4.5% GDP growth in 2016. Portugal, on the other hand, shows little fiscal improvement as evident in an unemployment rate of 13% and an expected GDP growth of only 1.6% in 2016. Although both countries faced tough financial crises in 2010, Ireland has notably outperformed Portugal in resolving the situation. The weak economy in Portugal, as well as continued fiscal hardship in the remaining “PIGS” countries, threaten the preservation of the European Union as financial inequality between the members persists.

The roots of Greece’s economic problems extend deep down into the recesses of history. After the government dropped the drachma for the euro in 2001, the economy started to grow by an average of 4% annually, almost twice the European Union average. Interest rates were low, unemployment was dropping, and trade was at an all-time high. However, these promising indicators masked horrible fiscal governance, growing government debt and declining current account balances. Greece was banking on the rapid economic growth to build upwards on highly unstable foundations. In 2008, the inevitable happened – the Greek debt crisis.

With the impending Presidential election consuming the American news cycle, major media outlets and the general public alike have neglected a growing crisis within one of the world's most important centers of commerce and culture. Despite the domestic rancor over stimulus packages, runaway debt and rampant unemployment which has inspired fierce political debate here in America, the fact remains that many European countries have borne the brunt of the global recession currently decimating national economies. The so called Euro Zone, a consortium of 17 neighboring nations which belong to the European Union (EU) and have adopted the Euro as their common currency, has experienced unimaginable financial disarray during the last decade. In the modern age of globalized economic structures, the increasing instability emanating from European markets is now threatening to spread to Asia, America and around the world.

The European debt crisis was a financial phenomenon that affected multiple countries around the world and the shockwave almost collapse the global market. One of the countries that were greatly impacted by the crisis was Spain. Some of the implications of the event caused unemployment to skyrocket, debating the role of the European Union and the state Catalonia is seeking their independence. Ultimately, the Euro Crisis showed the weakness of the European Union and debate if it would last into the future.

As Europe slipped into recession in 2009, a problem that started in the banks began to affect governments more and more, as markets worried that some countries could not afford to rescue banks in trouble. Investors began to look more closely at the finances of governments. Greece came under particular scrutiny because its economy was in and successive governments had racked up debts nearly twice the size of the economy. The threat of bank failures meant that the health of government finances became more important than ever. Governments that had grown accustomed to borrowing large amounts each year to finance their budgets and that had accumulated massive debts in the process suddenly found markets less willing to keep lending to them. Hence, what had once begun as a banking crisis became a sovereign debt crisis.

The economic crisis within the Eurozone has grown rapidly for the past five years, and members of the European Union struggle to enact any effective measures to halt or reverse its effects. Perceived booms in the housing markets were really only bubbles which popped and sent entire national economies spiraling downward into recession. Nations of the Eurozone have accumulated massive public debts, far larger than the 60% of GDP maximum specified in the Stability and Growth Pact. In 2011, Greece’s debt reached an unbelievable 170.3% of its GDP. Economic punishments are the specified consequences for violating this regulation, but the pact has not been adequately or consistently enforced. So many states have fallen past the debt limit that

It’s no secret that Greece is in quite a predicament. The country is currently in the midst of a crisis that reaches not just all parts of Greek society but a global stage as well. Is Greece at the point of no return, will they end up defaulting on their massive debts from combined lenders, breaking away from the European Union (EU) and the singular monetary system of the Euro? While many people think that is the way to go for Greece, the government could also find solace in the examples of other EU countries. By looking at how these countries were in the same situation as Greece yet have managed to make the necessary spending cuts and social reforms, and in doing so have regained control. This paper, provided will be an overview of the

Background: From 2009 onwards several Eurozone countries have come under pressure from the financial markets as a result of rising debt levels, economic contraction and decreasing solvency indicated by all major rating agencies. Through raising funding prices on the markets and the lack of trust in these Eurozone members – they were not able to finance themselves to sustainable costs anymore. One country after the other (Greece, Ireland, Portugal, Spain and Cyprus) had to be “rescued” by the then established financial support measures such as the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). In exchange for these “bail-outs” countries had to fulfill certain economic conditions – mostly spending cuts – which led in turn to political change and instability.

As many countries are part of the European Union and heavily rely on the EU to financially keep their nations afloat, the shared economy must do what it can to aid those European nations with weak economies. Mentioned in Chapter 16 of lecture, a number of European economies struggled financing government debt, boosting interest rates on government bonds. Such countries included Portugal, Ireland, Italy, Greece, and Spain (also known as PIIGS).

❖ Late 2009, fears of a sovereign debt crisis developed concerning some European states. Sovereign debts (Gov’t debt) externally issued rose sharply due to numerous bank bailouts.

This time is different: Eight Centuries of Financial Folly, written by Carmen M. Reinhart and Kenneth S. Rogoff, was published just before Greece went into crisis. Just as they satiric title illustrated, so most people believe that Greece will never default again because “this time is different due to the wealthy ally within the EU”, but the Greece crisis came out immediately and strongly prove Reinhart & Rogoff’s statement “this time usually isn’t different and catastrophe eventually strikes again”.(journal1) This book is designed to cater to the desires of many governments that are enthusiastic about austerity and becomes the most influential economic analysis book around recent years.(paul letter2) In this essay, I will give a brief view of Reinhart-Rogoff’s theory and explore some criticisms of R-R’s work, and then summarizes their defences against those criticisms.