Europe's Debt Crisis

Topics: Eurozone, European Union, European Central Bank Pages: 5 (1683 words) Published: February 26, 2013
Europe’s sovereign debt crisis has captured the attention of people all over the world. The crisis is the result of several structural problems in the European Union, as well as the individual mistakes of some countries. The several effects of the crisis are varied and go from a European bank’s crisis, to potential default contagion to other countries, and the possibility of the separation of the European Union. European leaders seemed unable to act quickly and agree in a plan of action against the crisis, and everyday investors are getting more nervous about a possible default in several European countries. The different economic and political agendas of European countries seem to be in the way of reaching a solution that envisions problems ahead and not only solving problems that appear every day. The following paper will explore Europe’s sovereign debt crisis; focusing in Greece’s debt crisis.

Europe’s Sovereign Debt Crisis
When the European Union was created in March of 2000, the leaders of the European Union announced the Lisboan Strategy; a strategy whose objective was to transform Europe into a more competitive economy with better conditions for employment, and with regional cohesion. Now, the original aspirations of the Lisboan Strategy have vanished; Europe is plagued by unemployment, the whole region is in state of recession, and where there was spirit of cohesion there is now dissension. With the debt crisis, the structural problems of the European Union have been brought to light and the need to assess them is important to resolve the debt crisis, and not just to mitigate it. This paper will explore Europe’s sovereign debt crisis, from the causes, to the countries involved, and the possible outcomes. Europe’s sovereign debt crisis started more than a year ago; it was supposed to be a problem of just a small part of the European Union, but now it threatens to spread to larger European countries such as Italy. Europe’s sovereign debt crisis was first assessed after the 2008 crisis, when Lehman Brothers investment bank collapsed, and Icelandic banks found themselves with a debt burden six times the country’s GDP. This would eventually lead to the fall of the financial system in Iceland. Iceland became the first European country since 1976 to receive a loan from the International Monetary Fund (IMF). This was just the beginning of a series of events in different countries that would lead to the crisis we are seeing today (Abadi, 2011). The European sovereign debt crisis was caused mainly by European governments overspending for the last decade, particularly after the 2008 financial crisis. In the first years of the euro, the interest rates for bonds from countries such as Portugal, Ireland, Greece and Spain were reduced and they were almost the same as for stronger European countries such as Germany. These lower rates were facilitated by the European Central Bank, because an implicit guarantee existed that in the event of trouble the strong members of Europe would support its weaker members. However, with lower rates countries spent more than they could actually pay for. After the 2008 crisis, while other countries made adjustments because of the recession, these countries continue spending in order to support the way of life of their citizens (“Acropolis Now”, 2010). Greece is not the only country facing economic problems in Europe, but it has dominated investor’s concerns over the past year. Greece’s debt crisis was caused by the combination of the government’s high spending, weak tax collection, and excessive amount of external debts. During Greece’s change in government, in October of 2009, the new elected prime minister admitted that his predecessor had falsified national accounts. Greece’s country’s budget was worse than it appeared to be, the budget deficit was actually 13%, 4 times more than the 3% limit required by the European Union law, and also a stock of debt...
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