Please explain in detaile the European debt crisisSolutionIn

Please explain in detaile the European debt crisis

Solution

In 2007, EU economies, on the surface, seemed to be doing relatively well – with positive economic growth and low inflation. Public debt was often high, but (apart from Greece) it appeared to be manageable assuming a positive trend in economic growth.

However, the global credit crunch changed many things.

EU Bond Yields

Uncompetitiveness

Eurozone countries with debt problems are also generally uncompetitive with a higher inflation rate and higher labour costs. This means there is less demand for their exports, higher current account deficit and lower economic growth. (The UK became uncompetitive, but being outside the Euro, the Pound could depreciate 20% restoring competitiveness.

Poor Prospects for Growth

People have been selling Greek and Italian bonds for two reasons. Firstly because of high structural debt, but also because of very poor prospects for growth. Countries facing debt crisis have to cut spending and implement austerity budgets. This causes lower growth, higher unemployment and lower tax revenues. However, they have nothing to stimulate economic growth.

Individual Cases

Greece’s Case

In early 2010 these difficult developments reflected in rising spreads on sovereign bond yields between the affected peripheral member states of Greece, Ireland, Portugal and Spain, and most notably Germany. The Greek yield diverged in early 2010 with Greece needing eurozone assistance by May 2010. Greece received two bailouts from the EU over the following five years during which the country adopted EU-mandated austerity measures to cut costs while experiencing a further economic recession as well as social unrest. In June 2015 Greece, with divided political and fiscal leadership and a continued recession, was facing a sovereign default. However, on July 5, 2015 the Greek people voted against further EU austerity measures, with a possibility of Greece leaving the European Monetary Union entirely. The withdrawal of a nation from the EMU is unprecedented, and the speculated effects on Greece\'s economy if the currency is returned to the drachma range from total economic collapse to a surprise recovery.

Ireland Case

Ireland followed Greece in requiring a bailout in November 2010, with Portugal next in May 2011. Italy and Spain were also vulnerable, with Spain requiring official assistance in June 2012 along with Cyprus. By 2014, Ireland, Portugal and Spain, due to various fiscal reforms, domestic austerity measures and other unique economic factors, all successfully exited their bailout programs requiring no further assistance. The road to full economic recovery is still underway. Cyprus, too, reported a slow but steady ongoing recovery, averting further financial crisis thus far.

Summary of Main Causes of Debt Crisis