Student Blog Submission : European Debt Crisis

The Euro, first launched in January 1st, 1999, is the currency used by most of the institutions of the European Union and is the official currency of the Eurozone, consisting of 19 out of 28 member states of the European Union (EU), including the overseas departments, territories and islands which are either part of, or associated with the Euro area. The Euro was established when 27 countries signed the Maastricht Treaty and created the European Union. Following the financial crisis in 2008 in the United States, which greatly affected the entire world, the fear of a sovereign debt crisis developed in 2009 among fiscally conservative investors concerning some European states.

Several countries in the Eurozone have borrowed and spent too much money since the global recession began, causing them to lose control over their finances. Greece was one of the first Eurozone countries, followed by Portugal, Ireland, Italy and Spain to take a multi-billion dollar bailout from other European countries. This was the start of the European Debt Crisis, which by definition is the failure of the Euro. This threatened to bring down the entire continent, along with putting the rest of the world at an imbalance.

Now, how did it all come to this…?

Throughout history, most of Europe was at war, and countries fighting against each other tend to do less business or trade among themselves. Europe was a continent of trade barriers and several currencies. On top of that, both World War I and World War II crippled the economies of Europe. So, in order to help Europe heal, the leaders of the European countries decided to bring down the trade barriers and work towards building a unified and more prosperous Europe, allowing trade to be made easier and economic growth in sight. Finally, with the Maastricht Treaty signed, the 27 counties were in a unified Europe under the European Union.

When the Eurozone adopted the Euro, they discontinued using their different currencies, along with discontinuing their own monetary policies, giving control to the newly formed European Central Bank (ECB). Although the Euro area now had one unified monetary policy under ECB, it still had different fiscal policies (financial liberalization), which is one of the key reasons for the sovereign debt crisis, leading to the initiation of the European financial crisis. It is important to note that the monetary policy determines how much money supply will go across the market and the interest rates will be for borrowing money, whereas the fiscal policy determines how much money a government collects through taxes and how much it spends.

A government can only spend as much as it collects in taxes, and anything above that, it will have to borrow, in other words deficit spending. And as countries could now borrow from a pool of funds at a lower interest rate from the ECB, they started borrowing more than they could handle, and to add onto that, they borrowed again to repay they loans, and this kept going on in a vicious cycle, giving rise to the banking crisis, which is exactly what happened to Greece, Italy and Portugal. Credit flowed, debt accumulated and the economies of Europe became tightly intertwined. This went on until 2008, spurred by a housing bubble in the US housing market, a credit crisis swept the globe, bringing borrowing to a halt everywhere.

As the biggest and strongest economy in Europe, Germany was the country that everyone in Europe was looking towards, as no other country could pay. This meant austerity measures to be set by Germany have to be followed by the countries being bailed out. The EU not only needed a monetary union (ECB), but also a fiscal union as Europe was in danger, otherwise, the stability of the Euro can be threatened. If this is not done, the monetary union may break, leading the Euro to disappear, in other words, fiscal union or a break-up. Today the unemployment rate in the Eurozone is at 12%. The European debt crisis is on the brink of pulling the entire Eurozone into recession, dragging the global economy down with it.

Even though Germany has been the economic engine for the Eurozone, its slowing economy could join the rest of the region in recession, putting Germany’s ability to carry the region in serious jeopardy. Despite a shared currency, the Eurozone is made-up of different countries with vastly different cultures, histories, philosophies, and economies. These differences illustrate just how difficult it is for disparate countries to work together with one unified voice.

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