Euro Crisis: Nine Years Later, Still Below Pre-Crisis Level - Essay Sample

Introduction

Euro crisis is considered the most serious economic crisis in history (EU). The global recession started in 2007, and in 2016 nine years after the crisis, Eurozone countries were still below the pre-crisis level. The effect of the crisis has caused severe damage in the economy than the great depression in 1930(craft 2013). Euro crisis has evolved in euro countries with a broad insight of the evolution of the crisis in peripheral member states countries like Portugal, Ireland, Greece, and Spain and contrast in countries that have fared well during the crisis. The aim is to investigate the factors, effects, and impacts on the fiscal deficit, federal loans, the balance of payments, and social spending.

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The euro crisis is evolved as a consequence of numerous factors. The exact triggers of the crises varied from Nation to Nation. The euro debt crisis began after a big recession at the end of 2009 and included debt accumulation. The crisis caused the financial industry in some states to reduce its money spending, and the impacted state needed to be bailed out of recapitalization loans. The recapitalized bank contributed to a fall in debt-to-GDP levels in 2010, with borrowers seeking elevated interest rates for countries with higher debt and account deficits. This rendered it impossible for four Eurozone countries to fund and cover their budget deficit and government debt. At the same time, the economic growth rate was weak and external debt was high, for example, Greece and Portugal. Sovereign restructuring loans saved four Eurozone countries from international monetary institutions. The key primary causes of the four sovereign debt crises that have arisen in European countries are reportedly the combination of slow current economic and future growth. Economic weakness; recapitalization of banks and sovereigns causing high debt accumulation, deficit and; high pre-existing debt-to-GDP ratios (domestic product) and significant rates of expenditure from the government, private and non-commercial sector). To combat the crisis, varieties of legislators have focused on rising taxation and rising spending, which has contributed to social discontent. While sovereign debt was viewed as an issue for euro economies, Ireland, Greece, and Portugal collectively registered for 6% of the euro zone's domestic product (GDP) as the most affected regions. This led to some countries leaving the Eurozone and five countries others seeking help from other Nations in 2012 (Vranceanu, 2013).

Graph 1: Greece Balanced Budget, as Public Revenue Remains Low

The Eurozone recession was triggered by a balance-of-payment problem, a rapid cessation of the financial money of countries with large debts dependent on foreign loans. The creation of international debts arose from monetary mismanagement (Baldwin et al., 2015). The recession started in Greece eventually expanded to other Eurozone countries such as Italy, Portugal, and Spain. Euro periphery countries borrowed extensively from abroad before 2010 to fund domestic demand and real-estate bubbles. Sudden termination of international credit to euro periphery countries contributed to a rise in debt. In turn, the loss of private capital pushed these countries to reduce overall domestic expenditure in government and private, more directly in line with local incomes. Euro periphery countries borrowed extensively from abroad before 2010 to fund domestic demand and real-estate bubbles. The Euro Central Bank served as a rescue to the last recourse countries and the government to handle the balance of payments to stabilize the markets of these countries. The Euro Central Bank stabilized capital markets by offering complete, unregulated aid to all Eurozone countries involved in sovereign bailouts. Loans offered collateral to periphery commercial banks to cover for international loans. The euro crisis has its origins in the architecture of the Economic and Monetary Union (EMU) itself features, which, in effect, are attributed to the complicated political environment of the development of the single currency (Goulard, 2012).

Graph 2: Current Account Imbalance 1998-2014

The implementation of a common monetary policy became a big concern in the economic, monetary union owing to the disparities between the economies of the main European countries and the peripheral euro countries. Northern European economies were increasing quickly, while periphery economies were developing steadily, with incomes and prices rising, for example. At the same time, Germany stagnated following the adoption of the euro, while Spain was growing rapidly (Goulard, 2012). However, a decade of pay stagnation and inflation after German unification has rendered the country's industrial sector more competitive as Germany returns to its conventional export-oriented role. In Spain, on the other side, incomes grew steadily as the economy boomed. Consequently, inflation remained at or below zero in Germany, while prices grew more steadily in Spain for almost a decade, these differentials in development and inflation contributed to a significant difference in labor costs within the Eurozone. The ECB interest rate was 3%, which indicated that the interest rate in periphery countries was small relative to regional inflation. This suggested that the interest rate in Germany was 2% although it was negative in Spain. These low-interest rates offered Spain a strong incentive to borrow, while creditors in the north had good opportunities to lend from Germany. In turn, Germany's historically steady savings rate has risen further as its workforce ages and trade surpluses grow. The consequence was a massive influx of funds from the surplus countries in Northern Europe to the debt countries on the edge of the Eurozone.

Debt accumulation in certain euro area countries was mainly attributed to monetary policy differences within euro area Member nations after the implementation of the euro (Moradi & Paulet, 2015). The sovereign loan services introduced a rate that allowed lenders in main euro area countries to lend to the periphery countries, while the periphery was under strain to borrow because lending rates were low. This contributed to debt development in southern countries, mainly in the private sector. Lack of monetary policy integration among Eurozone member states has led to imbalanced financial flows in the euro region, combined with a lack of credible stimulus guarantees, which boosted banks' risky financial transactions. Portugal and Ireland earned bailouts from sovereign funds in November 2010, and May 2011, and Greece issued its second loan in March 2012. In June 2012, evacuation kits were issued by both Spain and Cyprus, Returning to strong development and growing fiscal deficits, Ireland and Portugal were willing to exit from their loan programs. Both Greece and Cyprus gradually restored market trade. Spain has never publicly released a lending plan. The ESM bailout program was set aside for the bank's bailout program, which did not provide the Nation with budgetary assistance (Schimmelfennig, 2014).

During the decade following the creation of the Monetary Union, the countries of the periphery of the euro area invested more on spending and infrastructure, such as healthcare, than they could afford on revenue from the domestic output(Braun & Tausendpfund, 2014). The government expenditure surpassed tax revenue; the corporate sector was still piling up deficits. For instance, in Italy, Portugal, and Greece, Spain was dependent on loaned global money to finance the inflation in properties and other the consumption boom. Much of this leveraging was motivated Low domestic interest rates that come with inclusion in the Fiscal Union. Peripheral nations started reducing domestic expenditure during the financial crisis of 2008 to limit funding. Spain, for instance, cut the deficit in half, a 5 percent GDP. The start of public debt in 2010, Greece, and Portugal had significant gaps between spending and income amounting to 10% of their GDP. The created strain on developed countries, and they reacted by reining in spending more forcefully. The debts resulted in the reduction in investments in peripheral banks; Exports are growing against imports and save against spending. Throughout 2013, much of the trade transition that contributed to the current accounts falling below nil throughout Italy, Spain, and Portugal resulted from higher export sales Between 2010 to 2013(Moszynski, 2015). The marginal exports of products and services in these nations grew by 15% or higher, essentially in comparison with the growth in German exports. Higher exports in these countries helped demand, thus alleviating ongoing economic deflation.

Graph 3: Public Debt to GDP Ratios in Euro Countries

Euro crisis evolved because of sovereign loans to bail out countries that had huge debts from other countries. Some states did not adequately manage the investments, the social expenditure was high, and these countries spent more than they could earn, resulting in an accumulation of debts. Consequently, euro leaders surrendered power over fiscal strategy to the European Union, determines inflation of the euro region as a whole. Most major countries, especially Germany, had weak growth, which led the European central bank to set reasonably low rates (Hall, 2012). The pace was slow for particular thriving markets, such as Ireland, which Spain, which helped to generate substantial housing bubbles there. Lending rates for most Eurozone economies converged with the introduction of the euro, meaning states, for instance, Greece earlier had to pay higher duties than others; for example, Germany could now borrow more cheaply to draw investment.

Similarly, business sector lending prices in these regions have also been limited below German numbers. It has guided the development of public debt in Greece, Portugal, Ireland and Greece, and Spain, and private-sector debt. The euro area has grown at various levels. Most of the countries needing stimulus packages have often seen their market's productivity and profitability decrease due to increased wage costs than the euro area average, especially in Germany at the period. Countries in the periphery who were increasing sharply and purchasing a ton of goods were all decreasing in profits. After the euro was established, no system has been placed in place to deal with financial problems such as those seen since 2010 (Hall, 2012). As a consequence, urgent backup plans have been agreed upon. This lack of successful regulation has eroded trust in capital markets, prolonging the crisis.

References

Braun, D., & Tausendpfund, M. (2014). The Impact of the Euro Crisis on Citizens' Support for the European Union. Journal of European Integration, 36(3), 231-245. https://doi.org/10.1080/07036337.2014.885751

Call for Papers: "European Labour Force Survey (EU-LFS) and European Union Statistics on Income and Living Conditions (EU-SILC)." (2012), 41(3). https://doi.org/10.1515/zfsoz-2012-0306

Goulard, S. (2012). Contribution: The Financial and Euro Crisis, 2011 Dahrendorf Symposium in Berlin. Global Policy, 3, 51-51. https://doi.org/10.1111/1758-5899.12018

Hall, P. (2012). The Economics and Politics of the Euro Crisis. German Politics, 21(4), 355-371. https://doi.org/10.1080/09644008.2012.739614

Moradi, A., & Paulet, E. (2015). A causal loop analysis of the austerity policy adopted to address the Euro crisis - effects and side effects. International Journal of Applied Decision

Moszynski, M. (2015). Ordoliberalism and the macroeconomic policy in the face of the euro crisis. Equilibrium, 10(4), 41. https://doi.org/10.12775/equil.2015.034

Schimmelfennig, F. (2014). European Integration in the Euro Crisis: The Limits of Post functionalism. Journal of European Integration, 36(...