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Details of the European Crisis - Essay Example

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It is an ongoing debt crisis that has been impacting on European nations since 2009. The crisis started in 2008, with the downfall of Icelands banking system, and it spread to Portugal,…
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Details of the European Crisis
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Details of the European Crisis

Download file to see previous pages... The critical issues that shaped the crisis include; competitive weakness, weak and actual growth and large debt-to-GDP ratios. Other important issues are liquidation of banks and sovereigns, considerable liability stocks both in private, government and non-private sectors (Arestis & Sawyer, 2012). The crisis was complicated making it difficult for European nations to refinance or repay the debts of their governments without the intervention of a third party such as IMF or ECB. In addition, the banks within the Euro zone were undercapitalized and, as a result, were influenced by debt problems and liquidity.
Due to the crisis, the rate of economic growth was slow in the entire region. Similarly, the economic growth was unequally distributed across the member states (Lynn, 2011). The governments of the nations that were ruthlessly affected coordinated with "the troika". The troika is a committee formed by three international organizations namely, the European Central Bank, the European Commission, and the International Monetary Fund.
Virtually, in 1992 the EU signed the Maastricht Treaty. The agreement regulated their debt levels and the limit deficit spending. Nonetheless, at the onset of the year 2000, some of the member states defied the criteria of the treaty. These countries instead decided to analyze government revenues to minimize their deficit or debts. Therefore, evading the desired practice and not being able to follow the international standards (Arestis & Sawyer, 2012). This gave the sovereigns a chance to mask their deficit and debt levels by embracing a combination of approaches such as off-balance-sheet transactions, inconsistent accounting and the use of complex credit derivatives, as well as currency structures. The low-interest rates resulted to excessive government spending and borrowing primarily in member states like Greece during the decade lead.
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