The Europe Debt Crisis defines some countries in Europe having way too much debt and at risk of not being capable of paying back the debt. To explain the crisis that began in 2007 one has to understand the principle cause. Introduction of the Euro allowed some Eurozone countries to borrow at a greatly lower rate than before (Parrott, 2012). The Eurozone consists of 17 European countries that use the Euro including Germany, France, Ireland, Spain, and Greece among others. After the introduction of the Euro, this cost of borrowing levelled out. Due to this weaker nation were able to borrow more money and banks from larger economies lent more hence increasing their earnings (Parrott, 2012). The Europe Debt Crisis began when some countries borrowed a lot and spent excessively beyond what their economy could repay back. The consequences negatively affected global trade and United States financial system as well.
The principle rule obligated Eurozone countries not to exceed the budget deficit below 3% of Gross Domestic Product (GDP). Among the Eurozone members Portugal, Ireland, Italy, Greece, and Spain grouped under the unfortunate abbreviation PIIGS. They are some of the highly powerful countries in the Eurozone. The PIIGS used too much of the credit available to consume more, build social systems and fund construction boom (Parrott, 2012). Ireland experienced a huge real estate bubble, and banks recorded massive losses. Spain also underwent a similar predicament not because it borrowed excessively, but because it could not collect enough revenue tax to pay their deficits. The real estate bubble caused banks to write off huge loans secured by properties whose demand evaporated due to the poor economy (Eichler, 2011). In Ireland, the government stepped in as guarantors of these loans to prevent the main Irish banks from collapsing. Greece borrowed beyond its means and overspent beyond what its economic production could repay back.
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In October 2009, the government of Greece disclosed that its budget deficit hit 12% of GDP. The weak link that caused the crisis is the introduction of a monetary union with a decentralised fiscal policy. Countries were spending money uncontrollably, and there were no financial reforms to curb this (Parrott, 2012). They disobeyed the rules set, and even the Eurozone itself did not police these rules. For countries like Greece, they did not reveal right data about their financial and economic situation. Countries like France and Germany with robust economies kept their debt level manageable while increasing their earnings. However, deficits were piling up, and when 17 nations use similar currency, trouble blows out quickly. As the PIIGS’ debt became apparent, investors are hesitant to buy bonds from European nations since most of the countries are in debt and those who are not may have to help the ones who are (Eichler, 2011).
Today, ten European countries have undergone recession and had to be bailed out to prevent debt default. The European debt crisis is on the edge of pulling the whole Eurozone into recession. 14% of United States exports go to the Eurozone. Therefore, inadequate consumption in Europe is trouble for the US (Eichler, 2011). US will face massive trade losses if Europe goes into recession. Furthermore, it will also stall job creation in US and shrink its economic growth. If overseas banks collapse, the US could go into a credit crunch because all financial systems interconnect globally. Most of the Eurozone members have outstanding debts with the US; failure to pay them will lead to the US writing off huge sums of money yet recovered. US companies also have significant stake holdings in European economies, and at least one-quarter of top US companies earnings are linked directly or indirectly to Europe (Eichler, 2011). The collective size of the Eurozone economies equals to that of the United States, hence if the European debt crisis bursts it will surely be an economic catastrophe globally.
- Eichler, A. (2011). The European Debt Crisis: A Beginner’s Guide. The Huffington Post. Retrieved 25 November 2014, from http://www.huffingtonpost.com/2011/12/21/european-debt-crisis_n_1147173.html
- Parrott, W. (2012). The European debt crisis. http://www.accaglobal.com. Retrieved 24 November 2014, from http://upload.news.esnai.com
