Economic Crisis in Europe - Essay Example

This report will discuss the root causes of economic crisis in Greek and Spain followed by discussing some economic and financial strategies these countries have implemented to deal with the on-going economic and financial problems within its banking sector. Eventually, several lessons drawn from the public policies which aim to improve the performance of the banking industry in Greece and Spain including the broader economy in general will be tackled in details. Prior to conclusion, potential implications on other European economies and the U.S. will be identified if the on-going European economic crisis is left unmanaged.

Root Causes of Economic Crisis in Greek and Spain The economic crisis in Greek started in mid-2000s when the country was adversely affected by the global financial crisis. Specifically the global financial crisis during the mid-2000s has triggered a significant impact on its tourism, banking, insurance, and shipping industry (Talebi, 2012). To keep its economy sustainable, the Greek government went through a series of loan from the European Union (EU), the European Central Bank (ECB), the International Monetary Fund (IMF), and some major banks in France and Germany (Alderman & Ewing, 2012; The New York Times, 2012).

Since the total government deficit of Greece has reached $400 billion, its interest rate increases while the Fitch downgraded its sovereign debt rating to “BB+ status” or “junk status” (Hurriyet Daily News, 2012; Kollewe & Neville, 2012; The New York Times, 2011). As a result of excessive government deficit, Europe’s economic recovery is now being threatened (The New York Times, 2012). The case of Spain is similar but totally different from Greece. Even though the Spanish government has incurred a high government deficit, this country managed to cut down its government deficit from 11.

2% down to 9.2%, and 8.5% in 2009, 2010, and 2011 respectively (Weardan, 2012; Johnson, 2011). Due to high unemployment rate of 23.3% (Eurostat, 2012), Spain is unable to control its private mortgage debt (The Economist, 2012). Eventually, failure to manage the private mortgage debt can lead to economic problem related to housing bubble (Egan, 2012; Smyth, Callanan, & Doyle, 2012). Economic and Financial Strategies Implemented by Greek and Spain In general, government bailout is considered as a significant part of a country’s gross debt but not as a sovereign debt.

For this reason, the Greek and Spanish governments are using government bailouts as a strategy to solve their economic and financial problems. Specifically the Greek government started requesting for a series of bailout loans to make its economy run under a normal economic condition. Back then, its first bailout loan worth $146.2 billion (€110 billion) happened on the 1st of May 2010 (BBC News, 2012) followed by its second bailout loan worth €130 billion in October 2011 (The New York Times, 2012).

Using these bailout loans, the Greek government was able to reduce its primary government deficits even before it reaches the interest payments. As a result, the Greek government was able to cut down its deficit from €24.7billion in 2009 (Smith, 2012) to €5.2 in 2011 (Financial Info, 2012). There are several economic consequences with regards to Greek government’s decision to increase taxes on private sectors. First of all, its private sector and the overall economic growth of the country that is badly affected with the use of