The Eurozone Crisis - Causes and Solutions
The so called “Eurozone Crisis” began in 2009 when it became a publicly known that Greece national debt was over 113 % of their GDP. Consequently, Ireland, Portugal, Spain and Italy joined the club with their debt ratio exceeding 100 %. The investors concerned with the level of the sovereign debt, led to increased yield on the bonds of affected countries, which effectively caused the unsustainably deficits in those countries. Although European Union took certain preventive measures by setting up a rescue package, further political disagreements, lack proper planning and compliance with newly established rules, made the problem to grow and continue through 2009-2013. Needless to say, the Eurozone crisis with its complexity had a very inflicting effect on European and Global economy. Since the Eurozone is the world’s biggest economy, the impact of the crisis was felt in Asia and even has some effect on the recovering economy of the US (Eurostat, 2014). Furthermore, it exposed the weakness in the Eurozone monetary system – lack of sufficient monetary integration and need of fiscal responsibility of member countries. In addition, implicit guarantees of the sovereign debts of Eurozone members to the investors pushed the interest low, which in return gave an opportunity for the countries with weak economies to borrow more – that included governments, business and individual households to borrow more than they were able to repay. Moreover, long-term spending on social programs, such as public pensions, health care further exceeded what the countries’ economy could possibly pay for and required austerity measures contributed to the public discontent and anger.
In this paper I will discuss the origin of the European Crisis, its development and the current situation in the European Union’s financial and political market. Furthermore, I will demonstrate several possible solutions and preventive measures to those problems. According to my research, with properly applied austerity measures, improvements in productivity, and further monetary and fiscal integration, the Eurozone will be able to avert future financial crisis among their member states.
The table above illustrates different interest rates that investors charged EU member states in between 1995 and 2011.
Historical Aspect of European Economic and Monetary Union (EMU)
The creation of the Eurozone was conceived in 1952 by establishing the European Coal and Steel Council (predecessor of the EU). The purpose of this coalition was to prevent wars between European countries through controlled access to the natural resources (steel and coal) (Gilbert 33). Further political and economic integration took place in 1958 with the treaty of Rome that established ECC (European Common Community) and EURATOM (Atomic energy Commission). The 1988 SMA (Single Market Act) implemented the single market and paved a road to the single monetary policy. It...