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The European debt crisis started around 2009, when some counties become unable to pay their debts. The crisis affected more nations across Europe and not just the few that have been widely mentioned. It affected also countries that were not members of European continent. Worldwide impact was felt all over. Investors started to raise concerns on the level of government downgrading of the debts. European states such as Portugal, Ireland, and Greece started facing difficulties in re-financing their debts (Eichengreen). Around May 2010, finance ministers in the European zone approved a financial package of around 750 billion pounds to rescue the situation. The financial stability was to be rescued by a program known as European Financial Stability Facility (EFSF). The following year in October 2011 another package was agreed upon by the Euro zone leaders (Schulmeister 1). The package was to help in preventing the collapse of member economies.
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The causes of the European crisis were many. They include factors such as; the international trade imbalances, the fiscal choices made by member countries on government revenues, and expenses. In addition; there was globalization of finance, the neglect of social losses, and private debt burdens. Other factors were; the lending and borrowing practices adopted around 2002-2008 by member countries, and the economic growth conditions around 2008 (Riegert 1). Moreover, the emergence of real estates in controlling the economy, and member state actions of bailing out private and banking industries led to the debt crisis (Barry 187). The actions of individual countries varied from one nation to the other. These actions are what led to the debt crisis that was faced in Europe.
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An agreement was reached with banks, to write off the debt of Greece. This is the debt that it owed to private creditors. This increased the EFSF by around 1 trillion pounds. The agreement did also require the European banks to have 9% capitalization (Seeking alpha 2). A common fiscal union was agreed upon across the Euro zone. Such an agreement was to restore the confidence of people towards Europe. The EU ‘fiscal compact’ did raise eyebrows among member countries. The legal basis of it was questioned. This led to warning of fresh slump. This again made the member market be unsettled. Strict rules were fixed it the treaties of the European Union. Although the debt crisis affected few member countries in the Euro zone, it had effect and concern to the whole region.
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The effect on the independent countries has nonetheless not affected the European currency, which has remained stable despite all this. The currency was even trading higher Euro bloc than other trading partner blocks. This was around November 2011, when it was better than at the start of the crisis in the nations. The member countries most affected by the debt crisis account for about six percent of Euro zone domestic product (GDP). The countries are the ones earlier mentioned, namely; Portugal, Ireland and Greece (European Debt Crisis 1). The European debt crisis made banks like England bank to impose capital controls. This strategy was to revamp the global financial system. They believed this system was going to enhance recovery of the fiancé system and create jobs too.
The crisis has led to fallouts in the EU summit meeting with some member countries complaining of the outcomes. The action of the British Prime minister to protect the City of London is one example. His action may have ended up helping France in the handling of the crisis. The regulation of financial services was the result. According to Beverly the seventeen countries that make Euro zone and other nine other countries had an agreement (Beverly 26). The agreement was to create a two-speed that was to bring changes to the Lisbon treaty. Their actions left Britain isolated as their Prime Minister Cameroon refused to seize the opportunity in the agreement. He refused to take part in the deal. Support has come for his actions with others arguing that it was a reasonable decision. The argument is that the Euro project may disintegrate therefore; there is no need to sacrifice UK’s prosperity for such action (Seeking alpha 2). Yet others have argued that the action was a misjudgment and personal. It was only meant to appease his supporters.
The actions have resulted into Europe’s politicians having anger on Britain. The anger is incredibly obvious. The City has lost its competitive edge and key markets to rival manufacturers. The growing unease of the financial actions has continued. Markets such metal industry in UK is dominated by foreign firms. These investments were done because UK is part of the European community (Beverly 26). The crisis and actions taken by their leaders has to a great extent affected this investment. Stability and confidence by the Euro zone is what is needed for the markets to prosper. The actions of fighting financial and fiscal agreements that are tight can affect competitiveness. The divisions in Europe will eventually help the continent to share the economic suffering. This will need fiscal unity and greater political unity in restoring of the debt crisis confidence. This will overcome the divisions like the euro bonds.
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The crisis meant countries had to take some individual state actions. The battle was to be fought by individual states, and it was out of the hands of European decision making organ. The crisis has further divided the EU zone with a claim that Britain has joined hands with Swiss. Most Europe has gone towards the German, as a result (Rastello 2). The effect being, the EU will never be the same again. This has started to result into small advancements in policies, to combat the crisis. The eighth meeting of the leaders is a test to this. The fallout has resulted in unexpected pronouncement. The French President Nicholas Sarkozy once said that some members should not have joined the Euro club in the first place. The European debt crisis is the reason behind it, because before this was highly uncommon.
The European crisis led to the decline of Asian currencies. India’s rupee and South Korea’s won are examples of currencies that dropped significantly. The effect is to slow the regions economic growth. The Index of stocks also dropped. Methods of boosting the confidence on financial markets and reducing the crisis are needed. Consumer confidence, export growth and economy expansion were all affected by this crisis . Funding constraints have been experienced, and this has resulted into firms cutting their credit ratings. The tightening of anti-deficit rules in fighting the crisis has made countries, to wait with abetted breath on the effect of the economy. The European Union is the one that determines capital flows in the market, thus such attention on its activities. Inflation increased in many countries with consumer prices rising. The uncertainty of the global outlook has made it necessary for member countries to protect their economies. Other trading blocks have started to look at the European Union with suspicion. After every meeting, all eyes are on the standard and poor decisions of the Euro zone economies.
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The loss of confidence by banks, investors and policy makers who believe the crisis has taken long to be contained. The crisis is further attributed by policy choices in Euro zone. Member countries are not allowed to print their own currencies. The inflation control mandate is also done by The European Central Bank. Employment mandate is done by member countries and these types of policies bring harm to such nations (Tebbit 2). The crisis has made most members of the European Union; agree on a deal, to have the budget controlled centrally rather than individual governments. This plan aims at increasing the economic ties of the member countries. This has been hailed as bright fiscal compact that will help the situation. The seventeen nations who share the euro currency agreed. In total, twenty three European Union countries agreed to the idea out of the twenty seven members. It is noteworthy, to note that the only nation in opposition to the proposal is Britain, as the other three members are considering joining in the future. The debt problem faced that has threatened the euro has led to the plan. Europe economic crisis is another reason for the plan. Linden (97) notes, “The plan had an immediate effect as stock prices and value of euro increased”.
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International financial help has been advanced to Ireland, Portugal, and Greece. Italy and Spain are considered to be in greater need of help too. Worries have also arisen that the euro area is in decline financially. The calls for central budget supervision were called by German and French who are two of the strongest economies in the euro area. The call was to punish the countries that do not control their budget deficits . The plan called for members, to keep their deficits at below one percent of their economies output. The treaty is to be signed later, because the member countries have different methods of adopting such resolutions within their nation systems. Measures agreed upon were, to give International Monetary fund more money to aid in the stop of the euro zone crisis in the nations adversely affected. The fund is totaling to about 200 billion Euros. The U.S which led, the International Monetary Fund global firepower drive to pull the world out of recession is quiet in the European debt crisis. The economies of the member countries are expected to grow. The effect is to make the voters in the euro zone to lose their power in their budgets. The tax revenue will increase, government borrowing will be reduced, and the welfare costs will decline. This will be because of the quickening of economic activities. Failure to which the results will be what is being felt now. The growth is nonetheless still slow than what was forecasted in the implementing the actions. The bilateral loans to IMF by Europeans are a temporary measure. Italy and Spain are the members who have demanded loan requests to tackle the crisis. The working relations with other partners have made the G-20 to, also come in aid of IMF (Linden 74). Emerging markets also took advantage of the situation to put their weight in the global economy. The bailouts have been co-financed with IMF.
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The creation of European Stability Facility which is a legal instrument was to provide financial stability. This was to be done through financial assistance of member countries in the euro zone, having more difficulty in their economy of managing the debt crisis. It can issue bonds and other debt assistance. This is done in collaboration by German Debt Management Office for raising loans. The loans are given to the euro zone nations to recapitalize banks and buy their debts. The member countries are the ones who face the financial crisis. The bonds are guaranteed by the share of deposits of the member in the European Central Bank. By November 2011, the EFSF was expanded to give it up to 30% firepower in bond markets (Marsh & Mackenstein 146).
The funds are raised by EFSF after a request is made by a member nation. The member countries decided to write off Greek 50% debt held by banks. Measures have been taken to reduce volatility in financial markets. To improve the liquidity state in the country is also a priority. The methods included buying of both the government and private security debts. A three and six month allotment was announced for long term refinancing operations. Finally, the dollar swap lines were reactivated by the support of the Federal Reserve. Government bonds also were bought by member banks of the European System of Central Banks (Marsh & Mackenstein 144). The ECB bank changed the policy of loan deposits by member states. The lack of growth in Europe is a significant problem that resulted into the financial crisis. Reforms have been advanced for streamlining the fiscal sector.
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The long term solutions require a policy of fiscal commonness compared, to the investment approach that has been advanced. Countries such as Greece have already lost their control over monetary policies. Foreign policy has been affected by the coming of the euro. The effects will thus lead to lose in control over the domestic fiscal policy. The taxation and budgetary policy by a strong European Commission have infringed the independence of member nations. The mechanisms are such that they remove the independence of the member states. Penalties are to be advanced incase of a violation in the new debt rules and deficit. Tighter fiscal discipline is the result of such reforms. Euro bonds given jointly are an effective way of tackling the financial crisis.
The sustainability of public finance can be improved by the tougher fiscal and economic policies on the member countries that do not follow the rules. Germany refused to take the responsibility of debts incurred by other member nations (Devetak 87). They prefer tougher rules for nations who borrow, and end up in such crisis. Investors and policy makers however, see such method as the best for containing the financial crisis. Bailing out mechanism was established by creating a two line amendment to the EU Lisbon treaty. This included stronger sanctions against the member states. The European Commission is the one that plays a greater role in running ESM compared to the member states. The strategy is to control the spread of a crisis incase one country has defaulted. The mechanism ensures the banking systems are protected.
The cross border capital flow is to be regulated across Euro area. The imbalances can continue if this is unchecked. The trade imbalances in import and export of goods in member countries have to be checked. This in turn, will help the member states to have savings in their reserves. The saving of one country with a surplus can drive others across the region into deficits (Matlock 1). The trade imbalances can be reduced by encouragement of domestic savings. Rising of interest rates can also help in reducing this imbalance. The change of budget deficits, saving, and consumption behavior can help the members of the euro zone.
Speculations on euro zone brake up rose, due to the debt crisis. Many economists advocated for the disbandment of the zone. Countries such as Greece that experienced the debt crisis first were under pressure to leave the euro zone. The argument was for them to gain their own fiscal independence and adopt their currencies. German to save his currency, economists demanded that the country leaves the euro zone too. This disintegration call has however, been rejected by the German Chancellor and French president (Tebbit 2). The two have linked the entire European Union to the survival of the Euro. The expelling of weaker nations from the euro was not a solution according to the EU commissioner. The fiscal policies that maintain the responsibility of member nation to pay back its debt is a prudent measure. The government financial state that the annual deficit should not pass 3% of GDP is also measure taken to reduce future crisis.
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The credit agencies such as Fitch and Standard & Poor have played a role in the market bond crisis. The agencies have given generous rating despite the crisis due to their conflicts of interest. They act conservatively in own countries as in the case of Greece. They act in a political manner by bullying and down grading euro zone before EC meetings. This made the European powers regulate the agencies. The media ha also came into criticism on the role played in the bond market crisis (Steve 244). The financial speculators have also been accused of worsening the status of the euro. This led to banning of selling of euro for few months. The reactions of member nations to the crisis have been criticized too. The abrupt and panic nature of the actions taken as countries does structural reform and fiscal adjustments. Protests have been held due to the debt crisis.
Treaties to reduce spending and debt levels have been agreed upon. Countries such as Italy and Greece were however, unable to maintain these rules. In US, the crisis led to protective measures in maintaining their financial markets. Investor confidence has been undermined by the member countries manipulation, to control the crisis (Marsh & Mackenstein 146). The crisis led to many elections in the euro zone and end of national governments. Greece, Finland, Ireland, Italy where the Prime Minister resigned, and Portugal which went to elections following the resignation of its prime minister are a test to the debt crisis. The crisis has become a foreign and security challenge to member states.