European Debt Crisis
European Debt Crisis is a term which explains the struggle of European Union (EU) member states to repay their debt which has been built up in the past few years. Introduction of Euro in 1999 ( informally, it has been there since 1960’s) promised many benefits for EU member states, especially for the smaller countries namely low interest rates, low transaction costs, reduced inflation and freedom from a volatile currency (Wilson, 2010).
Most importantly, it offered protection to the member states from currency instability and thus a crisis. But this led to the countries spending way beyond their means without achieving the growth rate for a sustainable economy. The market treated all the states as one because of a single currency, and thus the poor economies kept on spending by relying on the sound economies growth without being exposed (Wilson, 2010).
When EURO had come into existence, it was decided on a borrowing limit of 3% of country’s total GDP so as to not get into the debt trap and stability and growth was decided as the priority. Italy was the first one to flout this norm, and it broke the annual borrowing limit regularly. Germany, France also broke the same. Spain stayed under the limit till 2007, and flouted this only after the financial crisis. Greece never stuck to the 3% limit but it was only a few years back that it was known that Greece had in fact tweaked its statistics to meet the convergence criteria. (Schultz, 2010)
Countries like Portugal, Ireland, Italy, Greece and Spain have been majorly involved in the debt crisis, though in varying degrees. Their economy growth rate has been sluggish, and they have failed to generate enough income to pay back their bondholders. This risk has resulted in a high bond yield. High risk is associated with these countries for which bond holders expect higher return and thus began a vicious cycle of increasing the debt burden of these countries. <http://www.bbc.co.uk/news/business-13798000>
This necessitated a series of bailout from 2010 where IMF and EU disbursed billions of Euros to countries. .A European Financial Stability Facility has been formed to provide emergency funding to the countries in trouble by EU member states. Austerity measures have also been taken by the countries involved in this crisis.
The Eurozone crisis is far from over, but the above measures and bailout would certainly help to rectify the mistakes EU member states, and EU did.