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The EuropEAN DeBT Crisis TABLE OF CONTENTS

   

Added on  2020-11-12

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THE EUROPEANDEBT CRISIS

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1MAIN BODY...................................................................................................................................1Main forces of European debt crisis............................................................................................1Consequences of crisis................................................................................................................2Solutions for crisis......................................................................................................................3Losers and winners of crisis........................................................................................................4Measures for preventing from similar crisis...............................................................................5Future of Euro.............................................................................................................................6REFERENCES................................................................................................................................8

INTRODUCTIONEuropean debt crisis is referred as the most serious financial crisis since 1930 by head ofBank of England. This term reflects the struggle of Europe in context of paying debts which wasbuilt in recent decades. The countries which were involved in this crisis are Italy, Portugal,Spain, Greece and Ireland as they were failed to generate economic growth which should be ableto pay liabilities to bondholders which was guaranteed. These five countries were in veryimmediate danger for creating default in the era of 2010 – 2011.MAIN BODYMain forces of European debt crisisIncreasing household and debt level of government is the main cause of crisis. In this,members of European Union signed a treaty where deficit spending and debt level was set to alimit known as Maastricht treaty. Excessive social welfare spending was known as the majorreason of debt crisis (Broto and Perez-Quiros, 2015). The debt level was increased because ofpackage of large bailouts given to financial sector and after that, global economic was slowdown.In the same series, there was rise in government debt in context of GDP. So, all fiscal deficitswere stressed in euro area which were shrinking or stable from early 1990. There was presenceof excessive lending via banks not spending created this crisis. There are different complicatedderivatives which turned this crisis very worse which is termed as credit default swaps which isan insurance like derivative instrument is labelled once as market was distressed by small CDSmarket and drive rate of bond interest rate of various sovereign nations.Trade imbalances created variation in labour cost which had framedall southern nationsvery less competitive and raised imbalance in trade. The nations of EU have enhanced the labourcost more than Germany. Competitiveness was lost as those nations increased wages but notproductivity. As labour cost was restrained by Germany as it was and debatable factor in this andit is cause for low employment rate which is considered as very important factor. It is indicatedby economic evidence that it has major role in trade deficits in t level of public debt. The interestspread and current account deficit has a strong relationship as it is not a debt crisis; in real, it isbalance of payment crisis.There was structural contradiction in Euro system which was the major cause of thiscrisis. There was presence of monetary union with absence of fiscal union which includes1

pension, taxation or any functions of treasury. They have to follow same fiscal path but forenforcing, they do not have common treasury. They did not have banking union as there was notany wide approach for bank deposit insurance, bank oversight, etc. There was fear of increasingdefault in bond yields but this is very expensive for paying interest on debt (Hallett and Oliva,2015). As high debt tends to increase high interest rate costs which is very difficult to pay. Theycan even apply Treasure Euro Dollar spread which is difference between interest rate on shortterm US government debt and on interbank loans for paying its debt.Consequences of crisisThis crisis has impacted the whole economy as there was huge loss to bank as manycommercial banks had lost money in bad debts exposure in United States such as subprimemortgage bundles. This has created downturn in economy or major recession by decreasing banklending and investment. It has also led to decrement in the prices of European houses which hadraised losses in context of European banks (Strategic consequences, 2018).Illustration 1: Economic growth slowdown(Source: Euro Debt Crisis, 2016)There was a major reason for sudden increase in government debt by recession. All thegovernment finances were deteriorated as there was negative growth and tax was received invery less quantity by government. It can be linked to unemployment benefits which were in highnumber fewer people were working so less income tax and less spending of people so give less2

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