Causes of Eurozone Crisis and its Impact on India
Causes of Eurozone Crisis: What started as a debt crisis in Greek in late 2009 has evolved into a broader economic and political crisis in the Eurozone and European Union (EU). It has following causes: * A Monetary Union without a Fiscal Union: The creation of the Eurozone had an inherent contradiction of being a monetary union but not a fiscal union. In a monetary union, political decisions taken in one country affect the economies of other countries. Long before the crisis, the Eurozone states began to violate the 10 Maastricht criteria of the Stability and Growth Pact, in particular in budget discipline (state budget deficit should not exceed 3% of the GDP). Had there been a fiscal union, the deficit and debt ratio of the peripheral economies may have been contained. * High Debt Levels and Public Deficits in some Eurozone Countries: During the good times, countries in the Eurozone could borrow money at low rates of interest. Because of cheap debt the euro area countries began to borrow more and more and invested in public subsidies and unproductive ventures such as property in Ireland and Spain. Eventually the Eurozone bit off more debt than it could chew. * Sharp rise in Commodity Prices: Capital inflows also fuelled domestic demand leading to high levels of growth in some countries but it also lead to high level of inflation. * Persistent Trade Imbalances within the Eurozone: Eurozone suffered from uneven development of the national economies. Increasing prices in the periphery reduced their competitiveness against other Eurozone countries, like Germany. As a result, the periphery countries started running into trade deficits which were associated with borrowing. * Economic Recession and High Unemployment in some Eurozone Countries: Economic shock from US subprime lending hit Europe which lead to high unemployment rates in the peripheral Eurozone economies. Majority of European countries...
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