Premium Essay

The European Debt Crisis

In: Business and Management

Submitted By scorpion1975
Words 1347
Pages 6
The European Debt Crisis
In 2009, Greece came forward and announced that their financial management of their economy had gone awry. Greece's revealed their budget to be 12.7 percent of gross domestic product (GDP), in addition, its debt-to-GDP ratio at 120% was twice the limit allowed in the Maastricht treaty. This triggered what is now known as the European Debt Crisis, and led to similar announcements by Portugal, Italy, Ireland, Spain and most recently Cyprus. In the next pages we will attempt to explain the events leading up to the crisis and potential next steps for the European community.
On February 7th, 1992 the 13 member nations of the European Council came together to sign the Maastricht Treaty. The treaty was designed to create financial stability throughout the Euro Zone by laying out fundamental fiscal policies for each country to follow. The treaty primarily encompasses four points: 1. Inflation rates: No more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the European Union (EU).
2. Government finance:
Annual government deficit:
The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year.
Government debt:
The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year.
3. Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for two consecutive years and should not have devalued its currency during the period.
4. Long-term interest rates: The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.
While all 13 members signed, at the end of 2010 only four countries were able to abide by the policy for...

Similar Documents

Premium Essay

European Debt Crisis

...European Debt Crisis Adelina Valencia Dr.Huang BUS 5200 April 27, 2013 European Debt Crisis On-line Mini Project The Eurozone debt crises all began when a newly elected government official took office in Greece in 2009. The prime minister announced that the deficit for Greece was 12.7% of GDP not 5% and said that the previous government had lied about this. This is what first started the European Debt Crisis. The government in Greece in May of 2010 announced that the budget deficit was much larger than what the previous government had predicted. Greece realized that they were not able to issue new debt to cover the new debt and its deficit. This is when the European debt crises all began and they requested help from the International Monetary Fund and the European Union and received a three year loan and 110 billion in euros. After two years, Greece still required assistance and the parliament approved another round of a second bailout of 130 billion euro’s. They deficit originally of 110 was actually not enough to cover their actual deficit and is why they had to ask for more help. The second year bail out required the private sector bond holders to take a reduction of the value of their bonds. The European central bank, European Union, and the International Monetary Funds stated that Greece had met the terms of the second bailout and Greece was running out of money. The Eurozone is a group of 17 members of the European Union....

Words: 1197 - Pages: 5

Premium Essay

European Debt Crisis

...European debt crisis and its impact on worldwide economy Shanika Mitchell-Gregg April 30, 2012 Dr. Tzu-Man Huang BUS 5200 Strategic Finance for Executives EMBA, 2011-12 (Stockton Cohort #7) “The European Union only takes action after the facts. They only address a situation when it has already become a problem.” Zdeneil Kudrna, political economist The European debt crisis was brought on by several Eurozone countries running large budget deficits and borrowing money from central European banks. Out of 27 member states, 17 of those countries use the euro as their currency. The larger countries involved were; Italy (the worst effected), Germany, Spain, Portugal, Greece, Switzerland, Britain and Ireland. The European economic debt crisis has resulted from a combination of complex factors including; the interconnection in the global financial system, that if one nation defaults on its sovereign debt or enters into recession putting some of the external private debt at risk. Easy credit conditions, during the 2002–2008 were a period ones were encouraged of high-risk lending and borrowing practices. International trade imbalances or international interconnection of debt protection, institutions entered into contracts called credit default swaps (CDS) that result in payment should default occur on a particular debt instrument (including government issued bonds)....

Words: 1281 - Pages: 6

Premium Essay

The European Soveirgn Debt Crisis

...December 10, 2012 The European Sovereign-debt Crisis Throughout history, debt has been an issue and a concern for many countries around the world. Nations borrowing money, unnecessarily spending, corruption, inability to pay back loans and a variety of other factors have contributed to the devastating and lasting effects of monetary absolution. In recent years, some of the most significant and devastating economic occurrences that have taken place were released to the general public. One that has received a great deal of attention is known as the European Sovereign- debt Crisis or the Euro zone crisis. The European Sovereign Debt crisis is an ongoing financial crisis that has made it impossible for some countries in the Europe to repay or refinance their government debt without the assistance of third parties (Wikimedia). Countries across the European Continent are struggling to find ways to cope with the crisis and the impact that it has taken on debt stricken nations. Europe’s politicians, regulators, and market players are trying different approaches to deal with the problems at hand (Bloomberg LLP). Due to the number of countries that are involved this financial crisis is not only affecting these countries but the entire world. The Euro zone crisis had a variety of origins that grew their roots over a course of many years, but the situation was not released to the general public until back in late 2009 when the concerns intensified....

Words: 3676 - Pages: 15

Premium Essay

Lessons Learned from Latin America and European Debt Crisis

...After reading the article on “Surviving A Debt Crisis: 5 Lessons for Europe from Latin America” by Samuel George from Bertelsmann Foundation, it seems very convincing that European leaders may have an opportunities to learn from the Latin American on how to handle and survive a debt crisis. The fundamental causes of these two debt crisis are highly similar. When the global economy was in good shape, massive lending was made to countries with unstable macroeconomic histories. Investors saw the lucrative opportunities to achieve high returns in some low-credibility nations but decided to take risks since there were no signs indicating any sort of recession. However, the second oil shock in 1979 led to spike in oil prices. As a result, the US went into recession, which drove commodities prices down significantly. Latin America countries import oil and export commodities, a deteriorated international trade situation slowed down their GDP growth. They were not able to pay for their loans which associated with floating interest rates. In 21st century European, the global financial crisis trigged a series of events. The Greek government had to spend heavily through debt to subsidize shipping and tourism industries which were harmed by the business cycle. Real-estate bubble in Spain and Ireland forced their governments to bailout private banks via national debts. It is, therefore, clear that in "sunny days", countries should be cautious about their borrowings....

Words: 1078 - Pages: 5

Premium Essay

The Contagious Impact of the European Sovereign Debt Crisis on the Foreign Exchange Market

...The contagious impact of the European sovereign debt crisis on the foreign exchange market 1. Introduction In 2010, the debt crisis caused the euro to go down 10% in a three-month period. Some largest hedge funds in America discovered this opportunity and short euro in groups to an enormous scale. Later on, the British pound is being infected. It continuously dropped for six days, which wrote the longest dropping period record. In this paper, the objective is to critically analyse how the European sovereign debt crisis affects foreign exchange markets. The theme focuses on the contagion on the markets. The contagion phenomenon exists between foreign exchange spot and derivative markets. One of the channels is the investor sentiment, which makes large scale of influences on both markets and volatility dynamics (Corredor, P., Ferrer, E., Santamaria, R., 2015). It makes sense on aspects like trading volume, effective transaction costs and so on. This paper has two main parts. The first part is to evaluate impacts on foreign exchange spot market through analysing the political channel, bank channel and financial markert channel. The second part is to investigate impacts on foreign exchange derivatives, especially on the foreign exchange swap. 2....

Words: 2683 - Pages: 11

Premium Essay

Debt Crisis

...The sovereign debt crisis in European region has raised utmost concern about the financial contagion from numerous quarters especially the media and the agencies charged with the duty of making monetary policies. The intrinsic fear about the ongoing sovereign debt crisis in Europe is that the act of default of a single sovereign country in the Eurozone would rapidly have spillover consequence that...

Words: 2386 - Pages: 10

Premium Essay


...Whether banking and supervisory structures at EU level proved adequate in responding to the debt crisis. It was in the end of 2009, when the EU debt crisis began and appeared as a major threat in 2010. The following reasons can be summarized which participated in the debt crisis. Violation of EU Rules- The beginning of the story of the debt crisis is related to the earlier stages of the time, when many European nations wanted to form a monetary union which lead to the inception of “Euro” as many participants violated the conditions needed under the Maastricht treaty. Countries like Greece and Cyprus didn’t had real data about the financial and economic conditions and EU ignored it. EU also accepted heavy debts by many countries at the time of crisis. Banking Sector Problem- The banking sector was collapsed when it got involved in the global financial chain which dragged down in 2007 financial crisis. The Banks were in a weak position because of the financial instruments of high risk will collapse in the debt crisis scenario and as the money they had was used for financing Government budget deficit rather than doing its important role of providing the money to Businesses and households which could have given them return for their ending amount....

Words: 1198 - Pages: 5

Premium Essay

Euro Crisis

...EUROPEAN DEBT CRISIS – ORIGIN, CONSEQUENCES AND POTENTIAL SOLUTIONS F RA N TI Š E K N E M E T H Abstract What is the European debt crisis? As the head of the Bank of England referred to it in October 2011, it is “the most serious financial crisis at least since the 1930s, if not ever.”1 In fact, the European debt crisis is the shorthand term for the region’s struggle to pay the debts it has built up in recent decades. Five of the region’s countries – Greece, Portugal, Ireland, Italy, and Spain – have, to varying degrees, failed to generate enough economic growth to make their ability to pay back bondholders the guarantee it’s intended to be. Although these five were seen as being the countries in immediate danger of a possible default, the crisis has far-reaching consequences that extend beyond their borders to the world as a whole. Introduction The global economy has experienced slow growth since the U.S. financial crisis of 2008-2009, which has exposed the unsustainable fiscal policies of countries in Europe and around the globe. Greece, which spent heartily for years and failed to undertake fiscal reforms, was one of the first to feel the pinch of weaker growth. When growth slows, so do tax revenues – making high budget deficits unsustainable. Greece's economy has struggled since the country joined the euro in 2001. In 2004, it admitted its budget deficit was higher than allowed under rules of entry....

Words: 2916 - Pages: 12

Premium Essay

History 102 Term Paper

...By the time bailouts were implemented by the United States government, the effects of the financial crisis were exported to Europe. States similar, but not limited to Portugal, Ireland, Italy, Greece, and Spain (PIIGS) have each been in the media spotlight in recent years as attempts to rescue their respective financial markets are implemented. Unfortunately, many efforts made by Eurozone member states and other international actors have failed in alleviating the financial stresses of the region. Considering this, then, is there really a permanent solution that can not only relieve financial markets but also prevent the crises from spreading? To date, the European Unions’ collective response up to this point has been insufficient in order to curb the further slide into Europe’s second recession. I contend, then, that Europe and the Euro would greatly benefit from following many if not all of Germany’s internal budgetary constraints in order to fix the overall problem of debt and spending. One of original intentions of the euro when it was established in 1992 was to limit the amount of budget deficit a sovereign member state could have. Furthermore, the euro was designed to prevent a “bailout” should a state be unable to meet its debt obligations. Consequently, the euro indirectly served as a scare tactic for member states to “pay their bills” or face a default....

Words: 3864 - Pages: 16

Free Essay

European Financial Crises

...Executive Summary Introduction Eurozone debt crisis, which is also known as European Sovereign debt crisis is an on-going financial crisis that the countries within the Eurozone such as Ireland, Italy, Portugal, Greece and Spain varying a certain degree that faces struggles to repay or refinance their government debt without the assistance of third parties. This has caused much worries faced by the European Unions and hence to the above crisis, thus causing a great impact beyond the borders to the world as a whole. We will look into various roles undertaken by the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) in helping to solve the euro zone Debt Crisis. European Central Bank (ECB) The ECB is one of the seven institutions of the European Union which was listed in the Treaty on European Union where it administers the monetary policy of the 17 EU members’ states where euro zone is consider one of the largest currency areas in the world. Founded in 1998, the central bank is one of the most important in the world with more than 500 billion euros in its reserves. Currently, the bank is based in Frankfurt, Germany and led by Jean-Claude Trichet. The primary function of ECB is basically to implement monetary policy for Euro zone, responsible for the care of foreign reserves of the European System of Central Banks, and to promote and conduct smooth operating of the financial markets and foreign exchange functions....

Words: 2049 - Pages: 9

Premium Essay

International Finance

...Introduction To understand into the trend of European currency change nowadays, the origins of the Euro (€) had been studied. From the background of Euro, initial idea for the creation of Euro can be trace back to 1979 when European Union (EU) set up European monetary system (EMS). Due to the successful of EMS, the European Union decided to form the Economy and Monetary Union (EMU) to create Euro in December 1991.The main advantages and disadvantages of a single currency for the countries and the zone had been analysis with the macroeconomics knowledge that has learnt from this course. The advantages mainly help to eliminate the floating exchange rate, transaction cost and price transparency, whereas the disadvantages include loss of sovereignty, cost of Euro and budget position. Thus, the significant influences of Euro dollar from birth to now, it can be known that Euro currency is defined under flexible exchange rate system. With flexible exchange rate, the currency can be effort between the capital movements, tax and subsidize international trade and therefore the currency from overseas will influenced the demand. 2. Analysis 1. History of Euro In January of 1999, single currency, Euro has been introduced by members of European Union. It has been approved by Maastricht Treaty and used by its members currently who called as Eurozone....

Words: 2771 - Pages: 12

Premium Essay

Eurozone Crisis

...In the research that follows, I will start with a brief history of the eurozone, how did eurozone face the debt crisis, and what might be ahead for the global economy, amid the ongoing European financial crisis. Eurozone is a term designated for all the countries that share a common single monetary policy managed by the Euro-system comprising the Frankfurt based –European Central Bank (ECB) and the central banks of member states....

Words: 2564 - Pages: 11

Premium Essay

Causes of the Sovereign Debt Crisis

...In the immediate aftermath of the financial meltdown in 2008, the global crisis has made an important shift. By then not the private banking sector, from where the financial crisis originally emerged from, but sovereign states face the risk of default. In order to analyse the multifaceted character of the European sovereign debt crisis, this essay focuses on its systemic causes. Contrary to the argument of popular Northern European politicians and journalists that blame the inability of Southern European states to manage deficit spending, the Eurozone crisis is firstly determined by imbalances in the European Monetary Union, and secondly by imbalances in the global political economy. This paper argues that the vast amount of sovereign debt is therefore not the result of weak Southern European nations, but of inherent structural illnesses that ultimately led to the current crisis. This essay is divided into two sections. The first section examines the problems of the design of the European Monetary Union. In regard to the theory of an ‘Optimum Currency Area’ by Robert Mundell, it analyses the extent to which the EMU has failed to meet the criteria of optimised efficiency. In the absence of an adjustment mechanism for unequal development in Euro member states, the dominance of Germany as leading export nation created severe inequalities....

Words: 2451 - Pages: 10

Free Essay

Causes of Euro Debt Crisis

...Causes of Euro debt crisis 1. Profligacy of the European Government & Unsustainable Fiscal Policy Countries including Greece, Portugal, Ireland, Spain and Italy in Europe are now paying a heavy price on their profligate way of spending, as reflected by the Euro debt crisis starting from late 2009. Fiscal policy is the use of government expenses and taxation income so as to influence the economy, while the average fiscal deficits had grown from 0.6% in 2007 to 7% at the beginning of the debt crisis across the Europe (Économistes Atterrés, 2010). Therefore, more and more debts were being issued by the above governments so as to support their national expenses, leading to an excessive rise in government debt levels. For instance, the average government debts per GDP had raised from 66% to 84% in the same period (Krugman, 2012).Basically, government debt is the money owed by the central government to the debt holders. As a result, with a high level of the debt-to-GDP ratio may imply that the country is less likely to repay the debt holders but higher chance to default on its debt obligations. Greece, contributing about 3.3% of the annual GDP towards the European Union (Central Intelligence Agency, 2012), with a 165.3 % of debt-to GDP ratio in 2011, was responsible for the outbreak of the Euro debt crisis. Historically, Greece Government’s Debt to GDP ratio was already at a relatively high level across Europe (McAuley, 2011)(Graph 1)....

Words: 1239 - Pages: 5

Premium Essay

Greek Financial Crisis

...Introduction The Greek debt crisis in 2009 occurred as a result of an understated financial deficit and extreme spending. The stagnation of the Greek economy and the demotion in their debt rating did not aid their financial situation. Greece was then faced with the possibility of sovereign debt default. The failure of Greece to pay their debts required bailouts from the European Union (EU) and the International Monetary Fund (IMF). While the loan bailouts have eased short term liquidity problems, Greece still remained in financial turmoil which may even deteriorate. This research paper aims to explore the history behind the Greek debt crisis, the implications it has globally and on South Africa as well as the lessons that can be learnt from the crisis. Origins of the Greek debt crisis 2.1 Historical development: 2001-2008/09 In 2001 Greece became the twelfth member to join the Euro zone and was permitted to use the Euro (€) as its currency. Greece joined the Euro zone because of the benefits associated with being part of the Euro area. These benefits were essential to the economy of Greece who had a record of unpredictable inflation (Gibson, Hall & Tavlas, 2012). In addition, after Greece changed to the Euro they had the freedom to borrow money from foreign capital markets....

Words: 1993 - Pages: 8