a. Greece’s heavily indebted economy
Greece as the country struggles to control a deficit that reached 13.6 percent of gross domestic product last year, more than four times the European Union limit of 3 percent
b. Turmoil in the Spanish banking sector
c. Global economic imbalances, insufficient risk management and a lack of transparency have contributed to the crisis
a. Some eurozone economies will not be able to pay back the debt
b. World stocks and euro dropped to 4 year low
c. We are going to continue to see the debt-GDP (gross domestic product) ratio rising in the countries which are struggling at the moment with fiscal deficits, including the UK. It’s going to take time to get deficits under control and in addition, now the key issue here is getting the balance right between sustaining the recovery and fiscal consolidation in the medium term
Europe’s Sovereign Debt Problem: Causes and Solutions
In Europe, many countries are experiencing troubles due to excessive sovereign debt. In particular, there are problems in Portugal, Ireland, Italy, Greece, and Spain (the “PIIGS”), with Greece and Spain particularly noteworthy cases.
What is the Source of the Problems?
The standard explanation for the problems in some of the countries, e.g. Greece, is that lack of effective monitoring of government deficits within euro area countries and lack of enforcement of the rules on how much debt a country can have allowed excessive debt levels to accumulate. In other cases such as Spain, the problem wasn’t irresponsible budget behavior, it was the recession that caused the government budget to collapse.
Thus, the problems were generated both by bad behavior and by bad luck, and once these countries got into trouble, the deficit problems were made worse by the fact that countries within the euro area do not have the ability to use independent monetary policy. If these countries had their own currency, they could devalue and... [continues]
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