European Sovereign Debt Crisis
❖ 2008, Iceland‘s international banking system collapsed following the collapse of the US financial sector
❖ 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.
❖ 2010, tensions rose in the countries of Greece, Ireland, Portugal, Hungary, and Romania.
❖ 2011, much concern focused on Greece because of its high budget deficit and government debt, previous political instability, creative accounting fiasco, and public debt maturity. EU/IMF provided emergency funding with the condition that Greece implements the agreed upon “Austerity Measures.”
Focus on Greece (Timeline)
❖ 2001, Greece joins Euro after meeting the rules on the Stability and Growth Pact.
❖ 2004, Greek government admits to the falsification of key statistics. Socialist government was ousted.
❖ 2005-2006, Austerity budget was implemented. Greek economy’s growth seemed strong.
❖ 2009, George Papandreou becomes Greece’s new PM. Fears of a financial crisis happening intensify following the US financial crisis. Previously reported understated key statistics left Greece reckless in overspending.
❖ Early 2010, there were sharp increases in Greek bond yields to quell fears of default. Germany opposes bailout of Greece. Stricter austerity measures are revealed to the public.
❖ Mid 2010, unable to pay-off maturing debts, Greece requests for a bailout from EU/IMF. Fears of contagion in eurozone erupt. Global stock markets reacted negatively, investor’s speculation fall. Further reductions/cutbacks enrage the Greek public.
❖ Late 2010-Mid 2011, Greek parliament adopts tax reform bil. Greece receives 1st instalment in EU/IMF bailout. Riots and protests ensue in other euro countries – EU member countries aside from Greece raise taxes to save its member.
Note: There is emphasis on Greece because of all euro countries that are experiencing deficits, they are the most worst off. Failure to save the Greek economy will have negative spill over effects (contagion) on other countries. This would reflect badly on the credibility of the Euro.
European Union (EU) and its role in the Greek debt crisis
Identity of the European Union
❖ Presently consisting of 27 member states, it is a union founded to enhance political, economic, social cooperation in Europe.
❖ EU was meant to bring economic stability and prosperity to its members by removing barriers in the movement of people, goods, services, and capital. Standardised policies on security and trade apply to all member states.
❖ It created a European single currency, the Euro, to help build a “Single Market” thus eliminating exchange rate problems, price instability, and fluctuating interest rates. It is a symbol of integration – increase in world influence.
❖ It is not a federation like the US or cooperation between governments like the UN.
Institutional triangle of EU
❖ Independent sovereignty of the member states remains intact but decisions on specific matters of joint interests are delegated to shared institutions (co-decision). These are:
o European Parliament – representing EU citizens
o Council of European Union – representing individual member states
o European Commission – upholds the interests of the union as a whole
European Central Bank (ECB)
❖ Based in Frankfurt, Germany. Its main purpose/s is to keep prices stable in its member countries, manage the eurozone’s foreign-currency reserves, and ensure the stability of the financial system by keeping close supervision.
❖ ECB works with the central banks of the EU member states. The European System of Central Banks (ECSB) is formed.