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Euro Crisis

The European sovereign debt crisis (often referred to as the Eurozone crisis) is an

ongoing financial crisis that has made it difficult or impossible for some countries in the euro

area to repay or re-finance their government debt without the assistance of third parties.

This is also known as Eurozone sovereign debt crisis. The term indicates the financial

woes caused due to overspending by some European countries. When a nation lives beyond its

means by borrowing heavily and spending freely, there comes a point when it cannot manage its

financial situation. When that country faces insolvency. (Insolvency: when it is unable to repay

its debts and lenders start demanding higher interest rates, the cornered nation begins to get

swallowed up by what is known as the Sovereign Debt Crisis )

Euro Zone: The eurozone is an economic and monetary union (EMU) of 17 European Union

(EU) member states that have adopted the euro () as their common currency and sole legal

tender. The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France,Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia,

Slovenia, and Spain

History:

The Eurozone debt crisis seems to surround Greece the most. The actual beginning is

how the European Union (EU) began in 1993 where 27 European nations "agreed to form an

alliance that could compete economically with larger nations such as the US". This is what

created the currency of the euro. The euro's value has decreased over the past few years due to

the European Debt Crisis.

The idea was to form a super state with the monetary union of the nations which would

in turn lead to the political union just like USA. The politics of economic union was the first step

towards the thought of United States of Europe.

You cannot have a monetary union without a fiscal union; you cannot have a fiscal

union without in effect a single finance minister which mean you should have a full political

union Lord Lawson, Chancellor of the Exchequer, 1983-89.

Thus it was great risk but politicians were anyway ready to gamble.

The EDC began in 2008 with the crash of Irelands banking system, which spread to

Greece. Greece had experienced corruption and spending as its government continued borrowing

money despite not being able to produce sufficient income through work and goods. It was

admitted that Greece's debts had reached 300bn euros, the highest in modern history

Spain, Portugal, and the other nations later followed Greece.

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Major causes for EDC:

Fiscal manipulation to meet the criteria of Maastricht Treaty criteria flawed the entire concept of a

successful monetary union thus leading to EDC.

1) The constraint that the Government debt must be 60% or less of GDP was dropped andinstead it was necessary to show that the country was reducing its debt towards that ratio.

This imposition could have prevented over indebted countries like Italy to participate in

the first place.

2) Some countries in this alliance hardy met these criteria and most of them manipulated to

show a 3% deficit using financial derivatives transactions. These contracts were meant to

reduce public deficit today and enlarge it 10-15 yrs later.

3) Greece on the other hand completely changed the figures and put forward fake numbers

allowing it to be a part of Euro Zone.

4) Even after the formation of Euro, it was decided that annual deficits must not exceed 3%

of GDP but in 2003 Europes two powerful members killed that rule.

Impacts:

The Eurozone debt crisis impacted market sentiment. The countrys economic conditionwill remain sound so as to withstand the effects of the lingering debt crisis in Europe and

uncertainties in the United States. 2012 was a tough one, with reduced global growth outlook due

to global uncertainties. Trouble abroad curbed the countrys economic growth last year anddampened the market. The debt crisis in the euro zone rattled investors and heightened demand

for safe haven and assets such as US dollars and bonds.In Ireland the government slashed public spending. They raised taxes. As an austerity

measure the government imposed a tax of 100 euros on every household in Ireland.Greece, Italy and Spain suffer from vast cuts in public spending, rising unemployment

leading to the decreased standard of living.

This crisis also affected the banks in UK because these banks are the biggest creditors to

the banks in Euro Zone.

Remedies:

Two approaches:1) Cut public spending: This would mean even more unemployment and thus people will

cut their own expenses and wont be able to pay debts which they have borrowed.

2) Dont cut public spending: This would mean an increase in the debt of your countrywhich has risk of a financial collapse leading to a devastating effect.

Thus these countries have chosen the first option along with the emergency loans from the Banksin U.S. which are being used as a bailout for the European banks.

Thus another debt is the only solution to solve this debt crisis.