Factors that had brought about the Euro crisis

What is the Euro crisis and discuss the factors that have brought about the Euro crisis?

i) Definition

From the research of Grauwe (2011), we find out that beginning in the late 2009, the debt crisis has been sweeping among many European countries, especially these EU countries, which makes many countries in this region such as Greece, Portugal, Ireland, Italy, and Spain and so on struggle to pay back their debts from the accumulation of the recent decades and unable to gain a healthy and enough development in their economy as well as the deficit in their budget. And we can get that it began from Greece, which can be inferred from figure 1.0 that from 1999 to 2010, the debt of Greek has been increasing fast than the average level of countries in the euro zone, that the debt of Greece even reach about 150% in the recent years while the average level remains about 86%.

Besides these countries, other EU nations have also been impacted. And although a series of measures have been enforced by both the EU and governments of different European countries, the influence of the crisis has been expanded. (Radowitz 2011)

Figure 1.0 Greek debt compared to average data in Euro zone

figure 2.0

Source: Eurostat

And moreover, from the survey of Featherstone (2011) in these countries, whose budget deficits and sovereign debts have increased so fast, a crisis of confidence turn up companied with several negative consequences. For instance, in Germany, although Germany was assessed to enable about €9 billion away from this crisis but interest rate bunds may be approximate zero. And in Switzerland, this crisis has bad influence on the exporting industry.

ii) Factors

High government debt levels

According to Darvas and Piasni (2011), there is seemed a government deficit in the EU countries of the entire European region in comparison with America and OECD. Since the signing of the Maastricht Treaty, EU nations pledged to restrict the deficit expense as well as their debt levels. At the same time several EU members including Greece and Italy had resorted to some means such as the complicated currency and the structures from the credit derivatives to circumvent the limitations from those treaties such as the Maastricht Treaty and manage their deficit as well as the level of debt. And as many economists point out, the rising level of debt in the euro regions resulted from the excess government expenses partly. For example, during the financial crisis period of the 2000s, the large amount of bailout packages invested into the financial sectors, which led to the rising level. And in the year of 2007, the average level of fiscal deficit in the European region was merely 0.6% compared to the 7% in the economic downturn period. And the average debt level from government also increased from 66% to 84% out of GDP. (Darvas & Piasni 2011)

For example, Irwin (2010) told us that to remove these side effects of financial crisis, EU government invested large amount of money in banks, setting up fund to assist layoffs, and building up new pension scheme. In Greece, a large amount of money was spent on projects and mismanaged.

Changes in economy field

There was a fiscal problem rising since 2002 during the period that these EU member countries started to enforce the common usage of the united currency named as Euro, which resulted in a rise of the interest rate in both Spain and Ireland with an astonishing growth rate in the housing market. With the fast rising price of the houses, a large number of house buyers began to borrow large sums of money from banks far than they could really afford, which largely shook the stability of the banking system in the European regions. This situation made governments and financial sectors such as the banks in the European region had to be faced with the reality that it would be very tough for financial institutions to operate without the payments from these debtors. (Wihlborg, Zhang & Willett 2010)

Stress on banking system and loss of confidence

As such amount of debt borrowed by citizens, it was very difficult for the financial institutions in the European regions to go on making money and extend these loans as the usual time. Due to this situation, it was able for consumers to get approval on bank loans to purchase houses which immobilized some certain kind of workers related to the housing sector such as he construction workers, sales people and so on. Such kind of situation further lagged the healthy developing of the economy in this region and the bad impact from the debt crisis had expanded as well. (Irwin 2010)

Besides the above factors, both the investors in the economy and consumers have learned about the bad situation of the economy in this region, which largely affected their confidence in the economy, which resulted in the decrease of the stock markets and the customer spending. Such kind of situation further deteriorated the influence of the debt crisis in this region. (Irwin 2010)

The weakness of the euro system

The other reason which contributed to the euro crisis was also stemmed from the united currency namely the euro itself. As

Besides these advantages brought by the euro, its weak points such as the lack of independent to depreciate or appreciate the united currency or use other currency related measure to alleviate the worse situation due to large debt load. First, all of the EU members can’t own the right to issue their own currency or carry out any independent monetary policies, which made most of these EU members inflexible or unable to enforce some proper monetary policy such as depreciating the currency to reduce the public debt level and improve the competitive of their exporting products in the international market but depending on tightening their control on finance or increasing the tax to pay for the debt. Such kind of weakness of euro made the bad economy situation worse still. (Wihlborg, Zhang & Willett 2010)

In fact, as the government of Iceland pointed out the major reason why Iceland was able to recover from the bankrupt alike situation was that its central government and bank were able to depreciate its currency so as to promote the exporting industry to boost its economy which can’t be enjoyed by these EU members. This weakness of euro is also the reason why the UK refuses to join in the EU again and again. (Wihlborg, Zhang & Willett 2010)

By and large, as the above discussion, the high government debt level, mismanagement of some governments of EU member countries, insufficient policies as well as the shortage of the euro finally resulted in the euro crisis.

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