On 1 January 1999 the Euro came into effect and in the years to follow countries such as Greece, Portugal, Ireland, Spain and Italy joined the euro, after allegedly complying with the 3% cap on borrowings as set forth by the EU guidelines. Since the Euro was initiated it became clear that the Euro was not as stable as it was projected in 1999 and discrepancies started to arise.
Questions were asked as to how the crisis started and whether there was a solution, but the latter still remains an unresolved issue.
The subsequent Euro crisis started, partially due to the US financial crisis of 2008, with the European countries being excessively exposed to the mortgaged back securities (toxic assets) of America, which in turn aggravated the unsustainable fiscal policies of the Euro countries. Moreover the EU zone saw an extended period of excessive borrowings mainly from the private sector and with extremely low Interest rates encouraged a debt-fuelled boom.
Although many European governments overspent, Greece was the main culprit especially after the financial crisis. The over-borrowing and spending allowed artificial low risk premiums to exist on rates of government debt from the so-called PIIGS countries (Portugal, Italy, Ireland, Greece and Spain), which under normal circumstances would not have been possible. The main problem in the EU was that many countries had large current account deficits which aggravated the Euro dilemma. Even though debt played a pertinent role, high government wages and low exports increased the ineffectiveness of the EU countries to mitigate the damage.
Greece was one of the first countries to feel the shock of the Euro crisis and in late 2009 admitted that they had reached a debt of 300bn Euros the biggest in EU history.
In January 2010 in a report from Europe, it came to light that Greece’s budget deficit from 2009 was adjusted with a increase of 9%, going from a mere 3.7% to a surprising 12.7%, which was more than four times the maximum allowed by EU rules.
There have been various policy responses by the EU with regard to Greece and the rest of the troubled countries. The first measure was a Bailout amassing to €110 Billion in 2010. When the EU realised that this measure would not contain the situation a Parachute measure was extended to other EU countries facing similar problems. The third policy measure was the ESM (European stabilisation measure) which initially set aside €80 Billion and afterwards another €420 billion in loans. The latest policy measure has been the Austerity package set forth by the Greeks, and in essence represents a decrease in government spending (government employees) and an increase in privatisation. The major approach was to encourage a compensation of fiscal cuts and economic reform in crisis- affected countries for liquidity support from the European Central Bank. These measures prevented a default from happening, yet a year later a new response was brought to the table in 2011, where holders of Greek bonds had to accept losses, as well as for more severity and financial assistance. The method that held the most promise was the ESM, but as with everything else, it sounded too good to be true. Morever, the ESM was immune against any form of judicial administrative or legislative judgement, but could sue the EU if there funds weren’t repaid. Can this really solve the poblem of the Euro crisis, or will the ESM only use their power to overthrow the EU?
Several solutions have been thrown at the malignant crisis in Europe, but so far little success has been achieved. Instead of asking how to solve the crisis the question should rather be converted on how aggressive a response should be and whether there is a definite solution for the crisis. There should be debated whether some countries should leave the EU and form its own monetary policy, whether it is the highly affected economies such as Greece, or economies which is carrying the EU at this stage such as Germany. One thing is certain, the crisis will not be solved in the near future, and international economies should brace itself for the dark ages of the world economy.
ECON621 International Monetary Relations 