The Sovereign Debt Crisis in the Euro Region - Essay Example

There were many European countries that agreed to pay out to potential investors on loan so that they could build their business or create a boom in their existing businesses. They started offering higher rates and better pay out to the bonds, and people started investing into them as their yield was comparably higher and better than the US security bonds that paid out less. There were quite many high risks lending and the loans that were being given out were not secure at all, thus when they defaulted this created a whole lot of collapses.

Creating a joint pool of savings and money created a domino effect, if one country defaulted all the countries in the pool would be suffering and this created the situation that if one drowned the rest would go down too as the countries were all connected. The current economic situation will ultimately cause many businesses to shut down and thus this will impact the current job situation. When the firms will start to close down there will be many people who will become unemployed, and this will increase the poverty rate in countries as well.

The countries will also face the loss of confidence and will have lesser external investments which would bring an overall halt in their economic growth. There are many reasons and causes that had resulted in the European crisis. The most prominent example is that of Ireland, they paid out loans without securities the investors and encouraged them to develop real state. The government assumed that this would boost their economies and bring in newer profits, but what they failed to acknowledge was what they would do if the borrowers failed to pay back.

This created a property bubble and their economy started to tumble because of non-payments of debts. In Greece they became benevolent to the workers and started paying out them in a great amount with relaxed debt conditions, and many countries even borrowed from global investors to bring progress into the country, this created external debts. Another real significant reason for the current crisis is that the government’s bailing out of large businesses, when they were suffering the financial crisis shocks, this caused the government to empty their own treasuries and have no benefits in return, they in turn themselves started borrowing a lot, and this led to them coming nearer to bankruptcies, as the inability to pay those large loans brought them on the verge of becoming bankrupt.

The increase in imports of the smaller European nations brought about an increase in the trade imbalance which again affected the economies of these countries greatly; Germany was the only country that had a positive trade balance. The best and most common method that is adopted by the countries to face the economic crisis is to print money, which causes devaluation of the currency, in case of Euro zone this is not possible as the countries have a pooled in treasury, they cannot print money and thus the inflexibility causes the countries to suffer together, it reduces the immediate impact but then instead of one all countries get affected (Kolb 2011).

It has been seen that once again the main issues related to the economic downturn has been caused by the Developed countries. The countries that are related to the European countries will have the greatest impact on the developing countries and the countries that are directly or indirectly related to these countries. For example if we have a look at China, they are the principal