European sovereign debt crisis

In 2010 take place the European sovereign debt crisis also known as the euro crisis. This crisis consists of a series of events that gradually became clear in early 2010, affecting the 16 member states that form the Eurozone.

Euro zone comprises 16 countries, which have commonly adopted a single currency: the euro, thus creating a monetary union.

Since 2010, the Eurozone suffers a crisis of confidence, with great speculation on the bonds of some of its member states, causing instability in financial and stock markets. In addition, has also caused a fall in the exchange value of the currency, the euro.

All this has created an environment of great uncertainty and risk, where countries have not been able to reach an agreement to resolve this crisis.

The crisis rose to prominence when spread rumors that Greece was going through a debt crisis, and that his Government would be forced to make a payment cancellation.

Soon after was made public, the Greek government had a large public debt, which stemmed from an uncontrolled spending. This fact violated the economic arrangements of the European Union. With the advent of the global financial crisis, the budget deficit went up, and investors, due to incalculable risk, required higher rates to lend to Greece.

The common currency crisis affected all European states that are part of the Eurozone. The euro area countries began to fear that the financial crisis which hit Greece ended causing a contagion effect on their economies.

This effect would have a greater impact on peripheral countries such as Spain, Italy, and Portugal, which also crossed a rather unstable economic situation. These countries, like Greece, had to take measures to adjust their accounts.

In March 2010, the Eurozone and the IMF met to discuss together a series of measures to engage the rescue of the Greek economy. But these measures were delayed due to disagreements of Germany, which currently is the leading economy of the Eurozone. During the months of negotiations, the EU showed its inability to reach an agreement. Meanwhile, increased the mistrust in the financial markets and the euro experienced a fall.

Finally, on May 2nd European Union (EU) and the IMF reached an agreement. They agreed to a rescue plan of Greece valued at 750,000 euro million. The aim was to prevent the debt crisis expanding throughout the Eurozone.

In addition, the May 10, they created a collective fund of stabilization for all member countries of the Eurozone. From that moment, all European countries had to adopt measures to bring its public funding. The austerity of these plans gave way to a new age in Europe.

“European sovereign debt crisis”. Wikipedia. web. 19th November 2011. European sovereign debt crisis-Wikipedia, the free encyclopedia


European global crisis.

The European Commission carried out a stimulus plan at European level, for which they should invest an amount of 200,000 million euros. The objective of this plan was get out of the global economic crisis that had erupted in 2008.

This plan included economic stimulus measures, taken by each country in the Eurozone. The aim was to boost demand and production.

Moreover, the ECB left the policy of restriction which until now had done. The financial institution lowered the interest rate in the Eurozone to 1%, a record level in history. His purpose was to stimulate investment.

All these measures brought a recovery in European economies, and favored a positive growth of production. But in late 2009, the EU economic growth was still weak.

But these measures only managed to increase the budget deficit of some euro zone countries, and therefore, the level of indebtedness. On the other hand, the economic recession caused a decline in tax revenues.

“European sovereign debt crisis”. Wikipedia. web. 19th November 2011. European sovereign debt crisis-Wikipedia, the free encyclopedia

The crisis in Greece.

In October 2009, it was announced, the dramatic economic situation of the country: Greece had a budget deficit of 12.5%, much higher from that of a few months (3.7%). This explains that, earlier, Greece had not been sincere in their accounts to the European Commission.

Over time, increased the budget deficit and indebtedness (on a 113.4%), both far above the limits that marked the Stability and Growth Pact of the member countries.

At first, Greece announced that it would not seek any financial assistance to the European Union, and would try to get out of this situation through internal measures, such as deficit reduction plan in 2010. But all these measures were not successful, and continued speculative attacks in the Greek financial market.

At the end of 2009, all feared that Greece entered into a cancellation of payments.

For this reason, the European Commission required to adopt more measures to the Greek government, because a fall in its economy could cause a collapse in the economies of the remaining countries.

In addition, demands on the Greek government, by the member countries so that they start their economic recovery, led to an atmosphere of unrest and violence in the country of Greece.

Greece was to make excessive cuts in its economy to get out of the public debt and thus, satisfy the requirements of the member countries. These large cuts caused a fear in the Greek population, and in general, a loss of confidence in the market.

But the fear of the debt crisis of Greece, extended to the countries of the European Union. So, the European Commission and German Chancellor Angela Merkel called for more efforts to get out public debt to Greece.

Angela Merkel, emphasized that it was necessary to keep public finances in order, and for this reason, they must intervene in Greece, as member countries, faced the danger that this situation of crisis affected the common currency.

In view of that the economic situation in Greece did not improve, the European Commission decided to intervene. The Commission devised a new plan much more hardened, causing an increase in violence and strikes in the country Greek.

“European sovereign debt crisis”. Wikipedia. web. 19th November 2011. European sovereign debt crisis-Wikipedia, the free encyclopedia

Failure in the monetary union.

The states that form the European Union found a dilemma. There was no clause in the Treaty Initial Union, which allowed rescue other economies. Therefore, the collective rescue to another country was forbidden. The reason was a rescue of another economy could have a negative effect on the economies of other countries: not encourage governments to reduce their deficits.

For this reason, Germany refused to provide direct support to Greece. The German country thought that everyone else did not have to pay for the mistakes made by Greece.

On the other hand, to carry out the rescue should have requested assistance from the IMF, and European countries did not want to get to that, because it would have meant a dependence on the IMF. Moreover, they would question the credibility of the euro.

Because of this, despite the IMF was willing to lend money, both Greece and the European Union refused to accept it.

While the threat of contagion risk on peripheral countries, was growing increasingly. Portugal, Italy and Spain crossed an unstable situation. And that would facilitate a contagion.

“European sovereign debt crisis”. Wikipedia. web. 19th November 2011. European sovereign debt crisis-Wikipedia, the free encyclopedia

The difficult rescue of Greece.

On 3 February 2010, was held, the Brussels Summit, where the EU announced the rescue of Greece. Members said they would support the Greek government to reduce its deficit, and they, would subject the country to a strict control to ensure that Greece fulfilled the requirements imposed by the EU. But, they did not announce any financial aid.

Greece will meet commitments, Papandreou tells Germany\'s business leaders

But this was not enough so to avoid the fear of contagion of some European economies, such as the Spanish economy.
On 11 February, EU leaders reached an agreement: they declared that would help Greece with its crisis, because this threatened the survival of the common currency, and other countries in the Eurozone. Leaders agreed they would carry out a joint action, in order to save the stability of the Eurozone.

Despite the announcement of financial support, did not recover confidence in the markets. Greece continued to take more and more austere measures, and the governments of the countries of the Eurozone, demanded more and more austerity.

“European sovereign debt crisis”. Wikipedia. web. 19th November 2011. European sovereign debt crisis-Wikipedia, the free encyclopedia

A large negotiation.

Governments of the member countries were in disagreement. There was a wide disparity of opinion as to the rescue of Greece. Many thought it was a national problem. But others refused to give aid to Greece. Germany, along with few other countries, was against the rescue plan for the Greek economy.

For this reason, countries that wanted to undertake a rescue of the Greek economy, such as France, were forced to push the German chancellor to reach an agreement.

On March 25, 2010, was made public the agreement between France and Germany, with the collaboration of the IMF and the countries of the euro zone to rescue Greece’s finances. The condition of the agreement was that only would trigger the rescue of Greece, if this is declared in default.

“European sovereign debt crisis”. Wikipedia. web. 19th November 2011. European sovereign debt crisis-Wikipedia, the free encyclopedia

Implementation of the rescue.

April 23, Greek President formally requested that launch the rescue. This request was caused by the results of Eurostat, which marked the Greek public deficit had risen. Greek debt went from being in class A2, to be, class A3.

But the plan was not activated quickly due to the refusal of Germany. While the debt of Spain and Portugal increased, and that caused a fall in European securities, and the fall of the euro against the dollar.

“European sovereign debt crisis”. Wikipedia. web. 19th November 2011. European sovereign debt crisis-Wikipedia, the free encyclopedia

The denial of Germany.

On April 28, 2010, the director of the IMF and ECB director, traveled to Germany to convince the German parliament for the rescue of Greece.

The reason for their opposition to Greece’s rescue plan was that German public opinion did not agree with the plan because Germany was the country that had much to contribute to aid for Greece.

Germany was ready to hold elections, and the government did not want to lose voters.

They thought that Greece had to solve their situation on its own, and if it did not, it would have to leave the euro area, in order to protect the remaining countries.

But Germany had a lot of money invested in Greek assets, and for this reason, does not interest him to expel Greece from the euro zone.

Also the history of Germany helps, this opposition of assisting Greece. If we go back to the days of Hitler, Germany requested financial assistance to neighboring countries, and they refused to give it. For this reason, Hitler came to power.

Germany now looks with contempt Greece, and will support it reluctantly. Germans think that what the Greeks have to do is to live within their means.

“European sovereign debt crisis”. Wikipedia. web. 19th November 2011. European sovereign debt crisis-Wikipedia, the free encyclopedia

“Germany Cuts Off Its Nose”. New York Times. Web. 28th November 2011. Germany Cuts Off Its Nose-NYTimes.com

Formal agreements.

Official approval of the last rescue consists of two stages:

The first part of the agreement was approved on May 2. Member countries and the IMF approved a credit line of 110,000 million euros to help Greece for 3 years, broken down as follows: the EU would donate 80,000 million euros and the IMF would provide 30,000 million euros. In this agreement, yet, there was still the individual approval of each of the countries.
In the second part of the deal was made official Assistance Plan, on May 7, approved by the European Central Bank.

“European sovereign debt crisis”. Wikipedia. web. 19th November 2011. European sovereign debt crisis-Wikipedia, the free encyclopedia

The creation of the Stabilization Fund.

On May 10, 2010, the finance ministers created a new stabilization mechanism with the aim to prevent the Greek debt crisis spread to other countries. This new body would provide loans, funded by the EU and the IMF, to countries of the Eurozone, with difficulty, that is, which have a high deficit and weak economic growth, such as Spain, Portugal and Ireland. Moreover, would give greater protection to the common currency, the euro.

“European sovereign debt crisis”. Wikipedia. web. 19th November 2011. European sovereign debt crisis-Wikipedia, the free encyclopedia

Weaknesses of the European Union.

The arrival of the economic crisis in Europe, it was shown that the Eurozone did not have political and economic integration.
The first gap that is reflected was the lack of control of the European Commission on the public accounts of the countries, especially in Greece. This lack of control over the public accounts allowed concealing the Greek government deficits.

On the other hand, there is a lack of cooperation among the member countries of the Eurozone. They only have a monetary union, leaving aside a fiscal union.

Addition, they also do not have an organization which manages potential crises in the area.

Therefore, the introduction of collective support mechanism is a step towards better coordination of economic policy. Addition, the European Commission has announced new laws to control public debt.

“European sovereign debt crisis”. Wikipedia. web. 19th November 2011. European sovereign debt crisis-Wikipedia, the free encyclopedia

Consequences in the common currency.

Greek crisis caused a decline of the euro against the dollar, mainly due to disagreement of the countries of the Eurozone in the rescue of the Greek economy and in the interventions of the IMF (that would have caused a dependency of the countries of the common currency). Other factors which affected the decline of the euro were: distrust in financial markets and the threat of expulsion from Greece of the Eurozone. The euro continued to fall, and the markets lost confidence in the European Union.

Everyone thought that, with the announcement of the rescue of Greece, the euro would cease to devalue. But it was not.
Between the 1st and 6th May 2010, the euro suffered its biggest fall. This fall took place before the activation of the rescue plan. The market moved in a context of uncertainty and excessive risk. That favored a rise in the dollar against the euro.

Sovereign debt of European countries is increasing and is spreading to other countries, like Spain, Italy, and Portugal. The situation is critical, and if any of these countries fall into bankruptcy would cause a threat to the survival of the euro and the rest of European countries.

In addition, if the euro collapses, the consequences would be global: global markets would be affected.

While the possible solutions to this situation, are expected. Some countries like Germany, do not understand why they have to rescue other members of the Eurozone.

The environment of countries with public debt is becoming more violent: citizens are angry to see that their governments are adopting severe measures.

But the solution is not to expel the debt-crisis countries in the Eurozone. If Greece was expelled, would be a collapse of the country. Would be required to create a new currency, and that would cause interest rates and the deficit rise. But it would also mean negative effects for the European Union, as the ECB and some member countries have invested in Greek debt.

For this reason, if European states do not take steps to reduce their expenses and set up a joint cooperation to resolve this situation, the euro will fall.

Some organisms, such as the OECD, are insisting the European Central Bank to intervene more in order to calm the crisis because governments of the member countries do not react.

But the ECB maintains that it is governments in the euro zone who must solve the crisis, and he refuses to buy large amounts of bonds of the member countries. Despite this, the ECB recently spent 8,600 million euros in the purchase of bonds. But this number is too small to get calm the markets.

This lack of action by member countries has led to both families and businesses do not believe in the measures chosen by the politicians, and that feeds the damage and instability, in the markets.

Time is running against. The debt crisis is spreading to other countries. Now, all Eurozone countries are in danger of infection, including major powers such as Germany.

If not get a remedy in time, the European economic crisis will become a global crisis, threatening the economies of other countries like the United States.

“European sovereign debt crisis”. Wikipedia. web. 19th November 2010. European sovereign debt crisis-Wikipedia, the free encyclopedia

“Euro zone crisis biggest threat to global economy: OECD”. Reuters. Web. 29th November 2011. Euro zone crisis biggest threat to global economy: OECD| Reuters

“Central Bank Keeps a Lid on Bond Buys”. Wall Street Journal. Web. 28th November 2011. EBC’s Bond Buys Keep Pressure on Euro-Zone Governments-WSJ.com

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