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How has the debt problem in Europe envolved - Essay Example

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How has the debt problem in Europe evolved? Using appropriate theories, assess how governments and institutions have responded to various events over the period 2012/13. In the 2008 wake of the global economic render down, the European Union (EU) has been undergoing struggles with a sluggish- but unwavering- crisis that laid emphasis on the flaws behind the region’s common currency, the Euro…
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Download file to see previous pages The EU market was lending to Ireland, Greece and Portugal at a rate that was at par with the one offered to Germany in 2008. The assumption at this point in time being that the Euro could never at any one given point break up and as a result, each and every country within the region was taken to be as safe as Germany- which had been considered to be the safest. For a very long time, Germany benefitted from the Euro zone crisis. The country had very low interest rates that made it even easier for the government to borrow more, thus creating a demand for more personal loans. The European Commercial Bank (ECB) even purchased German government bonds. Germany was seen to be the safe haven in European economics. Interest rates in the country had been going down since the start of the first symptoms of the crisis (Broyer, Peterson and Schneider 2012, p.2). . This was a part crisis how had the country performed before? Was it over heating? If no why? Following this assumption, Greece did accumulate almost 145% of its gross domestic product (GDP) as gross debt, a figure that was by far beyond what the country was capable of producing within a period of about one year and six months. As the crisis was progressing into its third year, it was not clear whether or not it would culminate in bringing to an end the straightening out or further accelerate the continent’s six-decade progress toward slow but sure confederacy, as Europe staggered between the currency’s (Euro) break up and the measurably stouter measures that would pave way for tighter political and fiscal bonds (Ernst & Young 2012, p.1). The move towards a single economic region, as adopted by the European Union in the unveiling of the Euro currency is informed by the optimum currency area theory. Presented by Robert Mundell, the theory outlines the features of a new currency developed after several currencies have merged. It deals with the currency of a region as opposed to that of a country; a particular region, larger than a particular country has to share a currency (Mundell 1961, pp. 658). In essence, the theory seeks to set out the maximum number of currencies that can be used in one particular region. The theory has enabled the close study of the many economic features that are key pillars in monetary unions. What does the theory say should happen? In spring 2010, Greece was not in a position of borrowing on the open markets at reasonably priced interest rates; a bailout package amounting to 110 billion Euros was devised by the European Union, International Monetary Fund and the European Central Bank. As an act of pay back Greece was required to cut down on its public spending by a quantifiable amount. In May 2010, the European countries’ government leaders made an approval of a contingency fund totalling to 500 billion Euros for the Union at large. In November 2010, Ireland did wrack a banking crisis after the collapse of a housing bubble and was in receipt of a bailout amounting to 6 billion Euros. Portugal, on her side, received 78 billion Euros as a result of a long-term economic laggard (Wharton 2012, ...Download file to see next pages Read More
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