What were the causes of the 2010-2012 sovereign debt crisis in the EU?

What were the causes of the 2010-2012 sovereign debt crisis in the EU?  What does this crisis tell us about the weaknesses of the euro?  Do you think the euro will survive the sovereign debt crisis?

Discuss the implications of the financial crisis in Greece on other countries in the Euro Zone.  What does the loss of confidence in Greece and indeed in Spain, Portugal, and Italy as well mean for the bloc?

What does a falling euro mean for U.S. companies exporting to the European Union and for U.S. companies with operations in the bloc?

Sovereign Debt Crisis

Sovereign debt crisis in EU started at the end of 2009. At that point of time states like Portugal, Spain, Cyprus, Ireland and Greece were unable to meet the payments and repay their debts. They all needed assistance from third party such as Internal Monetary Fund (IMF) and European Central Bank (ECB). Seventeen countries supported creation of European Financial Stability Facility (EFSF) in 2010 because of crisis (Kehoe & Arellano, 2012). Financial crisis of 2007-2008 was one of the reasons of sovereign debt crisis.

The great recession of 2008-2012 acted as fuel for the debt crisis as well. On top of everything real estate crisis and property rates and many of the countries started to shake. With everything else going on the revelation of Greece government in 2009 acted as last nail in the coffin. Greece government revealed that the previous government lied about the budget deficit. This shook the confidence of investors because that the deficit was far more than expected and that caused a lot trouble.

Since ongoing debt crisis the lenders raised the interest rates which were another problem for countries that were already facing the debts they couldn’t pay. To fulfill the requirements of high interest rates and the to pay off debts countries started to raise the taxes which became a reason of social upset within the society and started to create lack of confidence on leadership. All the countries were affected by the situation but Greece was in most trouble.

In times of crisis Euro can cause some troubles for the European countries. If every country had their own currency they adjust their interest rates according to their requirements to encourage the investors to invest but this is not possible in European countries. European countries, if had their own currency, could control exchange rate and if needed could devalue their currency according to their needs to encourage foreign purchases and help stable their economy but they can’t do it because they don’t have individual currency.

Another way countries deal with the economic crisis is by increasing government spending on unemployment programs. In hard time unemployment is a problem for citizens and they need social welfare programs from government. This helps economy but Stability and Growth pact European countries are not free to spend whatever amount they want.

Cheap exports of Germany are great support for European countries. If the euro didn’t survive it would a big problem for Germany as well and German would do anything to make euro survive. Another sigh of relief for euro is a lot of euro zone voters are rich and aged people who are not willing take much risks. They might suffer some crisis than breaking off with euro. Investors believe that euro is still new and should be given some time to get stable and right.

According to Kirkegaard, euro’s history of institutional innovation will help it survive. ECB still has a lot left to help euro survive the situation. ECB can buy 500 million euros if they find existence of euro at stake (Tseng, 2012). With the economic crisis of Greece reaching its climax, Greece could lose stability and sink. Greek sinking can affect the countries European Union and even cause the Euro to sink as well.

Greek is becoming the first developed country to be a IMF defaulter. With the collapse of Greece European leaders are trying to prevent the spread of this crisis. Vulnerable countries like Portugal and Italy could easily be affected by the crisis and leadership of Europe is trying to take measures to control that.

European leaders are eager to avoid doomsday and to save Greece as well (Chu, 2015). If Greek collapse and effect the Euro not only the Greece will suffer but everyone in the European Union will face to results of breakdown of Euro. One currency have its perks but in this case it could become a curse.

U.S always played a role in saving Europe from crisis because it has strong trade link with Europe. If something happens with the market of Europe U.S would definitely be under threat. U.S took actions to ease the crisis when Europe was facing sovereign crisis. U.S supported the IMF to participate in easing the crisis in Europe.

Almost 20% of U.S exports are because of trade with Europe and approximately 50% of U.S foreign assets are held by Europe (DADUSH, 2010). Not only that, 40% of Europe’s foreign assets is in U.S as well. Therefore crisis of Europe can be a reason of downfall in U.S exports and can endanger foreign assets of U.S. U.S also played important role in Greece rescue. It is concluded that Euros’ weaknesses are primarily dependent on the real time presentation of their data as well as their reliance on truth and fairness of each other’s fairness to ensure stability.

Bibliography

Chu, H. (2015, june 15). Greece debt crisis puts euro, European Union in peril. Retrieved july 15, 2017, from Los Angeles Times: http://www.latimes.com/world/europe/la-fg-greece-banks-crisis-20150628-story.html

DADUSH, U. (2010, JUNE 2). The Euro Crisis: A Threat to the U.S. Economy. Retrieved JULY 15, 2017, from CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE: http://carnegieendowment.org/2010/06/02/euro-crisis-threat-to-u.s.-economy-pub-40887

Kehoe, T. J., & Arellano, C. (2012). Chronic Sovereign Debt Crises in the Eurozone, 2010–2012. Retrieved july 15, 2017, from Federal Reserve Bank of Minnapolis: https://www.minneapolisfed.org/research/economic-policy-papers/chronic-sovereign-debt-crises-in-the-eurozone-20102012

Tseng, N.-H. (2012, june 7). Four reasons why the euro will survive. Retrieved july 15, 2017, from Fortune website: http://fortune.com/2012/06/07/four-reasons-why-the-euro-will-survive/