Critical Review-EU Sovereign Debt Crisis - Essay Example

This led to the creation of debt crisis in the countries of the European Union as the volume of bad loans started to increase (5 p,2). The increase in the number of bad loans led to the formation of a bubble until the bubble finally. This gave rise to the number of loan defaulters. The economy of European Union is such that the bloodstream of the economy is the interbank facilities of the European countries. The banks of the member countries not only lent each other for new finances but also offered credit for short term requirements.

The bank lost huge funds in the form of bad loans on the back of financial and economic crisis in 2008. The banks of the European Union in countries like Greece, Italy, Spain and others incurred huge losses. The liquidity crunch in the short term operational requirements raised serious concerns in the European Union (1 p,37). Due to interlink between the European economies, the increase in the number of defaulters in a member’s financial system affected the economy of another European nation.

For example, Italy owed an amount of $366billion to France. Due to non-repayment of loans, the increase in debt for France affected the economy of Italy. The spread of the liquidity crunch among the other nations in Europe and the rippling effect of the increase in debt of the European Nations resulted into the European sovereign debt crisis (3 p,29). Adding to this was the inability of the economies of European Union to print notes. The economies of the European Union had to depend on the European Central Bank based in Frankfurt for the provision of liquidity in the European economy.

The increase in debts of the European Union needed timely intervention from the authorities of the World Bank, International Monetary Fund and the European Central bank for their bail outs (4 p,59). The rise in debt securities is given below. Open market operations of the economy were encouraged by the European Central Bank as a step for bailing out the European nations from debt crisis. The European central bank bought the debt of the members of Euro-zone and also purchased the government securities.

The concerns on inflation were also addressed by the European central bank by absorbing the same amount of liquidity (7 p,4). The bailout package designed for the European sovereign debt crisis is given below. Evaluation and Interpretation The dependence of the European member countries on each other for credit led to a widespread sovereign debt crisis in the Euro-zone. The debt crisis led to high liquidity crunch in the European economy and the members of the European Union were in dire need of annual funding.

France, for example possessed a public debt which accounted to 86% of its GDP after the world war. Taking all micro as well as macro-economic factors into consideration for France, the country had an annual requirement of around 20% of its GDP. Greece and Portugal were among the member countries which were largely affected by the Euro debt crisis with protests and showdowns ion Athens and Lisbon (2 p,45). The requirement of annual funding for Portugal, Italy, Spain and Belgium were 20%