Euro Zone Crisis
Euro Debt Crisis Explained by Tejvan Pettinger on July 10, 2014 in economics
In 2007, EU economies, on the surface, seemed to be doing relatively well – with positive economic growth and low INFLATION. Public debt was often high, but (apart from Greece) it appeared to be manageable assuming a positive trend in economic growth.
However, the global credit crunch (see: Credit crunch explained) changed many things.
1. BANK Loses. During the credit crunch, many commercial European BANKS lost money on their exposure to bad debts in US (e.g. subprime MORTGAGE debt bundles)
2. Recession. The credit crunch caused a fall in bank lending and INVESTMENT; this caused a serious recession (economic downturn). See:cause of recession
3. Fall in House Prices. The recession and credit crunch also led to a fall in European house prices which increased the losses of many European banks.
4. Recession caused a rapid rise in government DEBT. The recession caused a steep deterioration in government finances. When there is negative growth, the government receive less TAX:
(less people working = less INCOME TAX; less people spending = less VAT; less company profits = less corporation tax e.t.c. )
(The government also have to spend more on unemployment benefits.)
4. Rise in Debt to GDP ratios. The most useful guide to levels of manageable DEBT is the DEBT to GDP ratio. Therefore, a fall in GDP and rise in debt means this will rise rapidly. For example, between, 2007 and 2011, UK public SECTOR debt almost doubled from 36% of GDP to 61% of GDP (UK Debt – and that excludes financial sector bailout). Between 2007 and 2010, Irish government debt rose from 27% of GDP to over 90% of GDP (Irish debt) .
Selected EU Debt 2007-2010
Green – DEBT in 2007
Blue – DEBT in 2010
Facts on EU debt
EU Bond Yield
MARKETS had assumed Eurozone debt was safe. Investors assumed that with the backing of all Eurozone members there was an implicit guarantee that all Eurozone debt would be safe and had no risk of
In 2007, EU economies, on the surface, seemed to be doing relatively well – with positive economic growth and low INFLATION. Public debt was often high, but (apart from Greece) it appeared to be manageable assuming a positive trend in economic growth.
However, the global credit crunch (see: Credit crunch explained) changed many things.
1. BANK Loses. During the credit crunch, many commercial European BANKS lost money on their exposure to bad debts in US (e.g. subprime MORTGAGE debt bundles)
2. Recession. The credit crunch caused a fall in bank lending and INVESTMENT; this caused a serious recession (economic downturn). See:cause of recession
3. Fall in House Prices. The recession and credit crunch also led to a fall in European house prices which increased the losses of many European banks.
4. Recession caused a rapid rise in government DEBT. The recession caused a steep deterioration in government finances. When there is negative growth, the government receive less TAX:
(less people working = less INCOME TAX; less people spending = less VAT; less company profits = less corporation tax e.t.c. )
(The government also have to spend more on unemployment benefits.)
4. Rise in Debt to GDP ratios. The most useful guide to levels of manageable DEBT is the DEBT to GDP ratio. Therefore, a fall in GDP and rise in debt means this will rise rapidly. For example, between, 2007 and 2011, UK public SECTOR debt almost doubled from 36% of GDP to 61% of GDP (UK Debt – and that excludes financial sector bailout). Between 2007 and 2010, Irish government debt rose from 27% of GDP to over 90% of GDP (Irish debt) .
Selected EU Debt 2007-2010
Green – DEBT in 2007
Blue – DEBT in 2010
Facts on EU debt
EU Bond Yield
MARKETS had assumed Eurozone debt was safe. Investors assumed that with the backing of all Eurozone members there was an implicit guarantee that all Eurozone debt would be safe and had no risk of