Euro Zone Crisis

Topics: European Union, United States public debt, Eurozone Pages: 42 (13944 words) Published: April 28, 2013
Sr. No.| Particulars| Page No.|
1| The Euro-zone – A background| 3-3|
2| The Euro-zone crisis – Beginning and causes| 3-4|
3| Evolution of the Crisis| 4-7|
4| Country wise Analysis| 7-17|
5| Structural Problems with Euro-zone and the Crisis| 18-19| 6| Political impact on Euro countries| 19-20|
7| Implications of Euro-zone crisis on Developed countries and Emerging economies| 20-23| 8| Possible Solutions for the crisis| 23-25|
9| Measures undertaken to resolve the crisis| 25-25|
10| Lessons Learnt From Euro Zone Crisis| 26-26|
11| What India Can Learn| 27-27|
12| Annexures and References| 27-29|

1] The Euro Zone: A background

On January 1, 1999 eleven European countries decided to denominate their currencies into a single currency. The European monetary union (EMU) was conceived earlier in 1988–89 by a committee consisting mainly of central bankers which led to the Maastricht Treaty in 1992. The treaty established budgetary and monetary rules for countries wishing to join the EMU - called the ―convergence criteria. The criterion were designed to be a basis for qualifying for the EMU and pertained to the size of budget deficits, national debt, inflation, interest rates, and exchange rates. Denmark, Sweden, and the United Kingdom chose not to join from the inception.

The "Euro system" comprised the European Central Bank (ECB), with 11 central banks of participating States assuming the responsibility for monetary policy. A large part of Europe came to have the same currency much like the Roman Empire, but with a crucial difference. The members were sovereign countries with their own tax systems. Greece failed to qualify, but was later admitted on 1 January 2001. The ‘Euro’ took the form of notes and coins in 2002, and replaced the domestic currencies. From eleven euro zone members in 1999, the number increased to 17 in 2011.

2] The Euro zone crisis:

Over the last two years, the euro zone has been going through an agonizing debate over the handling of its own home grown crisis, now the ‘euro zone crisis’. Starting from Greece, Ireland, Portugal, Spain and more recently Italy, these euro zone economies have witnessed a downgrade of the rating of their sovereign debt, fears of default and a dramatic rise in borrowing costs. These developments threaten other Euro zone economies and even the future of the Euro.

Beginning and causes of the crisis:

It all started with the global economy experiencing slow growth since the U.S. financial crisis of 2008-2009, which exposed the unsustainable fiscal policies of countries in Europe and around the globe. Greece, which spent heartily for years and failed to undertake fiscal reforms, was one of the first to feel the pinch of weaker growth. When growth slows, so do tax revenues – making high budget deficits unsustainable. The result was that the Greece Prime Minister, in late 2009, was forced to announce that previous governments had failed to reveal the size of the nation’s deficits. In truth, Greece’s debts were so large that they actually exceed the size of the nation’s entire economy, and the country could no longer hide the problem.

Investors responded by demanding higher yields on Greece’s bonds, which raised the cost of the country’s debt burden and necessitated a series of bailouts by the European Union and European Central Bank (ECB). The markets also began driving up bond yields in the other heavily indebted countries in the region, anticipating problems similar to what occurred in Greece. When investors revoke investments, it becomes harder for people to borrow money because there are fewer lenders. For businesses, paying suppliers becomes more difficult, and unpaid suppliers can’t pay their employees. Employment opportunities are fewer, salaries lower and spending power diminished, and a higher rate of unemployment means that more applications for loans are being rejected. Eventually, the...
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