Debt Crisis in Europe - Essay Example

Debt Crisis in Europe Introduction The debt crisis in the European supremacy continues to shake the economic marketsand the Euro zone. In order to reduce fear and doubts, the International Monetary Fund and the European Union (EU) have provided emergency aid to Greece, Portugal and Ireland. Nevertheless, doubts and uncertainties have occurred over the efficiency and the energy of multi-lateral institutions like the EU (Sandoval et al, 2). The Euro zones’ financially concerned economies, particularly Ireland, Portugal, Greece, Italy and Spain, generated a stern crisis of self-assurance. In October 2009, the beginning of the global financial crisis in addition to Greece public debt admittance, glimmered shock throughout global markets as the full extent of Euro zone debt levels occurred (3). This paper will analyze the causes of this debt crisis, possibility of its persistence, its implications as well as some mitigation measures to curb the crisis. Factors leading to the European Debt Crisis In May 2010, Greece became the first EU country to get assistance from EU and the IMF worth 110billion Euros. Some of the Greece greatest matters that have continuously led to debt crisis have been its high level of public debts and its augmented budget shortfalls. In the year 2001, Greece already had a public debt beyond 100% of GDP, when it was joining the Euro. The adoption of the euro currency facilitated more approving terms for the refinancing of government debt, and the augmented GDP growth. However, Greece faced certain limitations, for instance impossibility to diminish the currency due to being members of the euro zone, and the lack of aggressiveness of its economy partially because of over hiring and overpayment in the public domain (Minescu, 99). In Italy, the global recession tightly shook trade activities, credit as well as trade confidence. The global decrease in demand reduced Italy’s sales overseas, constricting Italy’s private expenditure and productivity. In addition, the country’s joblessness rate persists to be the lowest amongst Europe’s debt-ridden nations. However, terror of adverse market reactions has restricted Italy’s capability to use economic policy to encourage its economy. By the year 2010, the general public debt increased to approximately 116.7% of GDP (Sandoval et al, 7). In Ireland, the global financial crisis hit the country in a very different way from the other affected countries. In Ireland, there was no compound plagiarism or the shadow banking systems. In the past decade, Ireland became a country of property developers and that is the only leeway in which the global crisis hit the nation. From the year 1993 to 2000, Ireland benefited from the average yearly GDP growth of almost 10 %, which prolonged even afterwards stimulated by the low interest rates and excessive lending. Ireland begun to drop due to decrease of the property prices between the year 2006-2007 and this continued due to the collapse of shares in Irish banks and the change of the banking crisis into a sovereign debt crisis. Additionally, in November 2010, the huge rise in Irelands lending costs ended due to its approval of aid from the EU and the IMF (Minescu, 99). The global recession also affected although it had a strong growth over the past fifteen years led by the housing boom. Spain’s productivity dropped dramatically due to swift declines in exports, investment, and private consumption. However, the weaker importation and the rising government demand offered some counterbalance. Another issue that led to debt crisis in Spain was the issue of unemployment, which its rate skyrocketed, getting to 20%. In addition, in the year 2007, the government deficit deteriorated from a surplus of 2% of GDP to a deficit of 11.2% of GDP in 2009 (Sandoval et al, 6). The history of debt crisis in Portugal started far off in the year 1990. As a result, Portugal experienced challenges in managing the country’s public finances. Additionally, in the year 2004, due to the development of the European Union towards Eastern Europe, part of the foreign direct investment swayed from Portugal towards new members. The capitulate of 6.7% compensated by Portugal for the ten year bonds vended in January 2011 was very close to 7%, which some Portuguese officials affirmed that was not a sustainable level (Minescu, 100). Factors that could possibly lead to acceleration of European Debt Crisis Although there are many concerted efforts to mitigate the debt crisis in Europe, various factors accelerate the crisis. For instance, the second Greek assistance might render the upcoming bailouts to be even more probable. The verdict to vigor victims onto private bondholders, although it seems to be fair, boosts the risk of grasping the bonds of other indebted euro zone governments. This means that investors will insist on higher yields to go on with funding Madrid and Rome, making it more costly for them to sustain the admittance to private capital (Schuman, 5). The future course of the euro crises will depend on whether Ireland and Portugal will accomplish the reform pledges made as part of their EU assistance and persuade shareholders to start giving them money again and even more. In addition, the politicians in any of these countries can go ahead in jostling severe sacrifices down the throats of the voting to preserve the euro (Schuman, 4). The bailout rule in Ireland and Portugal is the same as that of Greece, with similar postulations about swift return to the private debts markets, which seems unlikely any time soon (Newman, 7). Another factor that may lead to accelerating debt crisis is the incapability of the Euro to fight the crisis. The latest bond permits the euro leaders to use their $1 trillion bailout fund more efficiently. On the other hand, the challenge they face is that many market analysts assume that it is merely not large enough to offer the euro zone’s bark some bite (Schuman, 6). This clearly means that the euro zone has not yet found a complete solution or approach to solving its debt crises problems. The politicians in Spain and Italy have the duty of saving the euro. The euro zone is still struggling to fight its debts crises with the similar playbook that has proven to be a failure most of the times (7). Greece still has an opportunity in the next couple of years to evade its debts in some ways although they unwillingly do everything demanded of them. The Greece may even get a chance to abandon the European Union. Most analysts believe that it is predictable that Greece will need a debt restructuring and that the recent military exercises are simply buying time for Europe’s banks to plan on fabricating defenses against financial contagion (Newman, 9). The regional and the local banks in Spain could be sitting on a volatile amount of a difficult loss relating to a real- estate bust, which has caused fear and worry in Spain. The occurrence of this would require a conquest and an uncontrolled amount of bad debt by the Spanish government, a condition that was the same as to what inundated Ireland (8). The most genuine challenge is that the euro zone is still not attending to its deeper problems. There is no act on the kind of wide scale economic improvement across the zone to promote the growth and investment that would help weaker economies rejuvenate. The leaders of the euro zone have to comprehend that they are not handling a liquidity difficulty, but a structural problem that will not depart even with large amounts of bailouts (Schuman, 8). Implications of the European Debt Crisis The European debt crisis has resulted to fears and dilemma concerning the probable negative insinuations it creates to Europe, United States, and the world’s economy. The crisis could have possibly brought about awful economic costs to a world already in a severe global recession. In addition, the crisis has generated many uncertainties concerning the integrity of the European Union and its currency. In United States, the crisis could possibly reduce the pace of the United States economic rejuvenation in the short term. In the long term, the crises give a strict warning to the U.S. in regards to its financial policies and have lead to augmented debate concerning a parallel debt crisis exploding in the future (Sandoval et al, 13). In the 16-euro zones countries, the debt crisis have brought about alterations in the debt issuance performances. Prior to the crises occurred, these practices had reached to a common standard, involving placement of long-term permanent rates debt denominated in national currency through the viable sales. However, in the mid 2008, this standard did not prevail due to increase in supreme funding needs and unwillingness of most investors to take risks (Minescu, 101). Due to the debt crisis, many questions arise over the significant merge for a more assimilated Europe. In addition, more uncertainty surrounds the possibility of European nations to forego their sovereignty to guarantee economic discipline and stability on a regional level (Sandoval et al, 14). The growth of the crisis also brought about the critics of the credit rating agencies. Due to the financial crisis, there has been a lot of talk on the collapse of rating matters whereby credit rating agencies do not foresee the forth-coming crises. Regulators are again aiming to enhance the legislation concerned with conflicts of interest resulting from the business models used by certain agencies. This is because of the new wave of critics directed at rating agencies during this crisis (Minescu, 102). Solution to the ongoing European Debt Crisis In the year 2007, admitting the intrinsic risks of crises due to their common currency, the EU established the Stability and Growth Pact. The rationale behind the establishment of this pact was to set a budget deficiency ceiling of 3% of GDP and an external debt ceiling of 60% of GDP. In so doing, the pact would ensure that the member states preserved budget discipline in order to lessen systemic risk and support monetary stability. Moreover, the deal necessitated a greater harmonization of monetary and economic policies from members of the monetary union, decreasing the degree of national sovereignty and pressure from the member states (Sandoval et al, 4). The powerful states in Europe should pool their money and enlarge the European Financial Stability Fund to a position where it can backstop the banks against all losses from possible non-payments. The scale must not only cover up the direct losses on the banks’ regime bond holdings, but also must cover up any consequent losses that the banks might sustain from having written indemnity against a government evasion (Giavazzi & Kashyap, 10). Another way to mitigate the present European debt crisis is to look upon other economically leading nations for financial support. This means that those countries that are not financially stable should look upon the countries that are economically well-up. For instance, the Chinese premier Wen Jiabao declared his support for Greece, the European Union and its currency, during a visit to Europe. Wen cemented this support by pronouncing the creation of a $5 billion fund to help Greece shipping industry. In addition, China promised to invest in Greek bonds immediately they became accessible to the market (Sandoval et al, 12). Conclusion The debt crisis in Europe is far much severe than many people would think. The nations hit badly by the issue of debt crisis are Portugal, Greece, Ireland, Italy and Spain. The global recession has been the major cause of debt crisis in these nations. Although there are efforts by the European Union to address the issue, it is possible that the debt crisis will persist due to various factors. These include overreliance in bailouts, non-compliance with reform pledges and the incapability of the euro to contain the crisis. This crisis has caused serious implications in the region as well as in other nations like the United States. The main way of mitigating the crisis is by the individual member states in the European Union forgoing their sovereignty for the financial stability of the region. Works Cited Giavazzi, Francesco & Kashyap, Anil. How to Contain the European Debt Crisis. 2011. Web. Minescu, Ana-Maria. “Causes and Implications: Petroleum Gas.” Journal of the Debt Crisis 63.2 (2011): 95-104. Print. Newman, Rick. Why Europes Debt Crisis Will Keep Coming Back. 2011. Web. Sandoval, Lazaro et al. “The European Sovereign Debt Crisis: Responses to the Financial Crisis.” Journal of New voices in public policy 5 (2011): 1-16. Print. Schuman, Michael. Six reasons Europes debt crisis is not over. 2011. Web. Read More