The European debt crisis ,also referred to as the eurozone crisis or the European sovereign debt crisis is a multi-year debt crisis which commenced by the end of the year 2009 in the European Union. The European debt crisis is the shorthand term for Europe’s struggle to pay the debts it has built up in recent decades. The European sovereign debt crisis started with the collapse of Iceland’s banking system and spread primarily to its other eurozone nations – Portugal, Italy, Ireland, Greece and Spain .The debt crisis has led to a loss of confidence in European businesses and economies.
What caused the Eurozone crisis?
At the time of the Eurozone crisis,several member countries in the Eurozone had to dea with a lot of upcoming mishaps like high structural deficits, a slowing economy and expensive bailouts which resulted into rising interest rates, and which exacerbated these governments’ tenuous positions.
Causes of the Eurozone Crisis:
The eurozone crisis developed due to lack of mechanisms and to prevent the build-up of macro-economic and fiscal imbalances.
They were provided with limited access to other sources of finance and had limited fiscal transfers. Most of the peripheral countries ran large current account deficits and experienced deterioration in their external investment positions.
Rising concerns about fiscal problems spread rapidly due to the lack of common wide institutions to absorb shocks and growing uncertainty about the interpretation of the EU’s ‘non-bailout’ clause and the willingness of eurozone member states to support weaker member states and the currency union itself.
Strong reliance in peripheral countries on external capital and interlinkages between governments and banks worsened these problems.
Crisis countries were not able to use monetary and exchange rate policy, which created a chaotic situation leading to the euro-exit move which remained an unappealing alternative.
Effects of the Eurozone Crisis:
Although global economic conditions have witnessed some improvement but there are concerns that EU, which accounts for around 20% of the world GDP, faces a long term period for slow growth and its the way of response to the fiscal deficits that could trigger a recession.
Peripheral countries like Greece, Spain and Portugal faced more than two years of recession where the budgets cuts off the phase of social and inevitable unrest.
There is major downturn in financial tensions leading to bringing down the commodity prices.
Weak demands in the EU have depressed the exports and also the poor prospects for tourism, workers’ remittances which has led to certain problems for the european banks and economies.
There is inflationary pressure resulting to monetary tightening which could lead to a sharper growth slowdown than currently anticipated.
As per my opinion, Eurozone crisis have led to escalation in the financial market volatility. Tables can turn to the other side if mutual prosperity of the Eurozone countries and their citizens through demand expansion, rather than demand contraction for financial benefits could be recognized as the imperative or an alternative for the political viability of the Euro project.
Pragati Bhimani
The Endeavour Editorial Club 