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Macro Economic - Essay Example

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Summary
The Euro Debt Crisis and Economic Theory European debt crisis, a phenomenon that buffeted many European nations; also impacted the other side of Atlantic. Plenty of explanations often different in nature have been extended in order to find the possible reasons beyond this economic catastrophe…
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Macro Economic Essay
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Macro Economic

Download file to see previous pages... However, later a twin debt blow has been considered as one of the most prominent reasons behind the debt crisis. The twin blow came out of the banking crisis together with the previously mentioned extremely high sovereign debt. The European Central Bank (ECB) launched the single currency (euro) in 1999 along with the Economic and Monetary Union (EMU), aiming to gain monetary efficiency. An Economic and Monetary Union offers a series of monetary efficiency gains in forms of accounting ease among the member states that in turn reduces opportunity cost of transforming one currency into another, development among member states would be at par owing to reduction of any possible economic shock (that are often regional in nature), member states under an Economic and Monetary Union following a common currency would also abstain from intra inflow and outflow of speculative capital, furthermore policy formation among member states would be coherent and coordinated in nature that will eventually usher better economic growth and development. While fiscal irresponsibility on the part of periphery countries has been considered by many analysts as the root of the ongoing crisis, this paper argues that the impact on capital flows within the euro-zone of financial deregulation and liberalization and of the adoption of the common currency was critical in exacerbating a growing competitiveness gap between core and periphery countries and explaining the evolution of the crisis. Debt crisis unfolds- credit failures The crisis in Europe began when financial markets lost confidence in the creditworthiness of PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) and interest rates on government bonds soared to astonishing levels that forced the governments of these countries to seek bailouts from the international community, including the European Community, the IMF and the European Central Bank (ECB), collectively known as Troika. This was the period of the great financial crisis of 2007-08 which also affected the US economy. All began with the credit markets and spread to the other sectors of the economy owing to large scale defaulters of loans (ch 31). As determinants of growth, one can say that demand is important for supply or production to expand. The ongoing debt crisis began with defaults of mortgage loans the demand for which led to a rapid boom in the housing sector which led to the final illusion when defaulters began to rise (ch 25). It is often been opined that the utopia of a welfare state amidst the current era of globalization that fuels on competitiveness (both are diametrically opposite in nature) and populist policies like raising the wage of the public sector employees in turn cumulatively burdened the governments with high level of debt. This phenomenon is most evident among periphery countries and can only be reckoned as fiscal recklessness. It is evident from the above argument that fiscal disciplines on behalf of the periphery countries would restore Euro its previous status without any additional measures and to be precise further fiscal incentive. What lies beneath? – Expectations and mal-adjustment A deeper analysis of the dynamics underlying the current Euro crisis exhibits that financial deregulation and liberalization was a major cause of the crisis in periphery countries in the euro-zone. Driving up expectations owing to a sudden boom can ...Download file to see next pagesRead More
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