Introduction
Just as the world was gradually recovering from financial recession, experienced between 2008 and 2009, the world economy is once more in the verge of meltdown. With numerous European countries blaming Greece for failing to repay its debt, European countries are currently suffering from one of the greatest debt crisis in the history of the universe.
The crisis has plunge global financial market into a big turmoil with developed and developing countries suffering in almost equal measures (Reinhart and Rogoff 1676). Today, growth panorama in developed states has gone down to merely 1.5% while it is estimated that global growth will slow down by approximately one percent point.
In other words, the current problems affecting euro zone are not only affecting the European states but are also affecting other countries worldwide. This paper will look at the effects of the euro zone problems on Greece and the United States. In addition, it will focus on some of the laws that have been implemented to deal with the crisis and the changing environment across the globe due to the crisis.
Current problems of the Euro zone
Sovereign debt crises normally occur due to two reasons. One of the reasons is a lack of sufficient liquid assets to offset liabilities resulting from cash flow problems. The other reason is debt overhang, which occurs when the value of a nation’s assets is inadequate to meet its liabilities. While most of the sovereign debt crisis occur in the form of liquidity problem, the current crisis affecting euro zone comprise of the two forms.
For example, Greece is in debt to the extent that with its current debt burdens and interest rates, it is hard for it to offset its current debts sustainably. Greek insolvency has led to the crisis spreading to other euro partners such as Italy and Spain (Reinhart and Rogoff 1676-1681). On 27 October 2011, European leaders came up with European Financial Stability (EFSF) in a bid to address the crisis.
However, EFSF has not helped in addressing the crisis affecting countries such as Italy and Spain, which jointly have a debt of approximately two and a half trillion pounds. There is fear that if no proper measures are taken, it will be hard for the highly indebted euro zone states to borrow to repay their current debt affordably.
Effects of the Euro zone problems on Greece
Greece is blamed for the current crisis locking euro zone. Other countries are accusing Greece of conspiring to default on its debts. One of the major effects the current crisis has on Greece is slowed economic growth. Already individuals who invested in Greece bonds are taking a haircut on their debt. Some fear that the value of their debt may depreciate in future.
Hence, to avoid losing everything, they are opting to take half the value of their initial investment. In a way, this has made it hard for Greece to experience any progress in economic growth as investors are shying away from the country (Featherstone 193-201). Furthermore, the problems led to numerous riots and demonstrations in some Greek cities.
Failure by the government to address the problem made most of the Greeks demand for resignation of their prime minister. The problem led to political fall out in Greece forcing its prime minister to resign. Currently, the country has appointed a ‘technocratic’ prime minister whom it hopes will help Greece restore sanity in its financial deficits (Featherstone 203).
Effects of the euro zone problems on the United States
Little attention has been paid to the effects of current euro zone crisis on trade. Developed and developing countries are experiencing the effects of the euro zone crisis with respect to exports. For instance, since the crisis started, export companies in the United States have lost most of the European market. The crisis led to undervaluation of the euro currency compared to the dollar.
Consequently, it has led to products manufactured in European countries going to a lower cost compared to those manufactured in the United States (Reinhart and Rogoff 1682-1687). This has adversely affected companies in the United States since European industries have continued occupying their market in the region. Since 2010, there has been a shift from euro-denominated financial assets to dollar-denominated.
Moreover, the euro exchange rate to the dollar has declined by twelve percent. This has led to an increase in export competitive for European countries. In 2000, the European Union and the U.S. were at par with respect to exports, while by 2010, exports from euro member states were higher by 50% (Reinhart and Rogoff 1688).
On the other hand, the United Sates has benefited from euro zone crisis. Continued undervaluation of the euro currency has led to investors opting to use the U.S. dollar as the reserve currency. Currently, French and German banks are exposed to more than $900 billion in the euro zone countries’ debt.
Euro zone crisis slows the process of worldwide currency diversification away from dollar (Reinhart and Rogoff 1689). In return, it has helped the United States service its debts from earnings acquired from overseas lending.
Changing conditions
In dealing with the current fiscal challenges, euro zone countries have imposed numerous financial austerities on periphery countries as the condition for assistance. However, this has not helped in dealing with short-term problems. Rather than mitigating the financial problems, the austerities have ended up intensifying the problem.
The condition has led to countries like Greece, Italy, and Spain bearing the burden of dealing with the crisis leaving countries like Germany and France enjoying a free ride in the problem (Featherstone 204). This scenario is evidenced by pressure imposed on Greece and Italy to establish a regime capable of solving the crisis.
As the crisis continue to be a challenge in the euro zone, member states have started seeing the need for taking collective responsibility in solving the problem. States are now accepting to share the cost in dealing with the crisis.
Imposing fiscal austerity on periphery countries has proved unproductive in addressing short-term challenges in the region. To achieve a long-term solution to the crisis, core countries have accepted to finance some of the debt incurred by Greece (Featherstone 207). Furthermore, the states have agreed to finance banks in the country.
Policies for dealing with sovereign debt crisis
Sovereign debt crises are common in emerging market economies. In 2002, the international monetary fund (IMF) proposed the establishment of a Sovereign Debt Restructuring Mechanism (SDRM) to facilitate in addressing the problem of sovereign debt crisis. Numerous SDRMs were created using statutory powers to realize a debt restructuring entrenched within IMF program.
However, the policy did not work leading to the establishment of a policy that aims at improving market mechanism to address definite facets of the crisis resolution course. This approach is referred to as market-based approach (Reinhart and Rogoff 1689-1693). The pursuit of this approach, however, does not exclude IMF from the process of resolving sovereign debt crisis.
In fact, since the beginning of Latin American debt crisis in 1980s, actions, and policies from official sectors have significantly influenced sovereign debtors’ incentives during debt restructuring. One fundamental way in which IMF controls debt-streamlining process is by its policy dubbed lending-into-arrears. As a way of mitigating sovereign debt crisis, the policy prohibits lending to states that had failed to service their past debts.
Policies developed to address euro zone problem
As a way of dealing with the current sovereign debt crisis in Europe, member states have come up with a bailout policy dubbed European Financial Stability Facility (EFSF). The policy aims at addressing the solvency crisis affecting Greece and the liquidity crisis affecting other heavily indebted euro zone countries.
Some of the features in the policy include a deliberate write down of all Greek debts in custody of the private institutions. The policy aims at averting possibility of a default, which would have adverse effects on the zone’s sensitive financial market (Featherstone 208-215). The policy paves room for additional financial assistance to Greece on condition that its government implements financial austerity measures.
There are other two policies aimed at expanding the size of the EFSF to about one trillion pound, by using existing funds contributed by richer euro zone countries. The policies aim at establishing a buffer to cater for any contingencies, should the bankruptcy affect other countries in the euro zone.
On 9 December 2011, EU leaders agreed to contribute up to two hundred billion pounds to be used by IMF in assisting the indebted euro zone countries.
Affected laws
Since 2008, the euro zone has suffered from immense fiscal crisis. The constant fiscal crisis has tested the constitutional basis under which the euro zone was founded in varied ways. In an attempt to rescue the situation, member states have adopted various measures that have resulted in unexpected outcomes.
For instance, in trying to solve the fiscal crisis, European Central Bank (ECB) has assumed responsibilities and used powers that are beyond what Maastricht treaty allowed it. ECB has violated the guidelines stipulated under the treaty by engaging in issues that involve political value judgment rather than expert knowledge (Reinhart and Rogoff 1695).
Moreover, on 12 February 2012, Greece altered its austerity laws to allow for further assistance from the European Union, International Monetary Fund, and European Central Bank. Those opposed to the amendment were barred from their parties.
Implemented laws
To ensure that other states do not fall victims of the sovereign debt crisis, countries under the euro zone have embarked on altering their existing fiscal control mechanisms. They do this by amending their national constitutions using German constitutional as their template.
For instance, they have come up with a law that requires all European banks to have 9% capitalization to cushion them from financial hardships, which may arise due to Greek default (Reinhart and Rogoff 1698). Since Greece is the country that has seriously suffered insolvency, most of the implemented laws come from the country.
The country has severally altered its austerity policies to help it gain financial assistance from other euro zone states. On 9 March 2012, Greek government voted for revival of a collective action clause, which led to private holders of government bonds agreeing to support a debt restructuring deal (Featherstone 216-217).
As a way of averting insolvency, Italy has implemented laws aimed at freezing public institutions salaries up to 2014. Besides, it has come up with strong measures to curb tax evasion and increased the retirement age to sixty-seven years.
Changing environment
The current sovereign debt crisis in the euro zone has led to the political impasse in most of the member states. The effort by wealthier countries to rescue those in debt has led to taxpayers complaining. Consequently, leaders in the euro zone have organized numerous meetings to look for the appropriate measures to take. Most of the meetings have not born fruits with leaders disagreeing on whether to allow Greece exit from euro zone.
In addition, the crisis is affecting the voting process in European countries (Reinhart and Rogoff 1701-1703). For instance, French opted to vote a revolutionary leader in the hope that he will help the country in solving the financial crisis facing their country. Besides, the Italians called for Berlusconi to step aside to pave the way for leaders, who are capable of rescuing the country from financial hardships.
Sovereign debt crisis in the euro zone has led to western states reviewing their lending and borrowing modes. For instance, Americans are pressuring their government to come up with appropriate measures to assist the country offset its current debt.
The crisis has led to the issue of debts being at the centre stage in American politics. Americans are eager to know how the current presidential hopefuls will help the country repay its debt (Reinhart and Rogoff 1705-1706).
Conclusion
Sovereign debt crises facing euro zone are making it hard for countries to recover from financial recession, encountered in 2008-2009. The crisis has triggered turmoil in global financial market leading economic growth rate going down. One of the countries that are experiencing the weight of the crisis is Greece. Investors have avoided investing in Greece since the country is experiencing severe insolvency.
The crisis has also affected the United States, which has experienced appreciable reduction in volume of its global exports. To achieve short-term solutions, states in the euro zone have imposed fiscal austerity on the affected countries.
Some states have even gone to the extent of changing their laws to protect them from falling victims of the crisis. The crisis presents a wake up call to leaders across the globe to identify the appropriate measures of dealing with international lending and borrowing.
Works Cited
Featherstone, Kevin. “The JCMS Annual Lecture: The Greek Sovereign Debt Crisis And EMU: A Failing State in a Skewed Regime.” JCMS: Journal of Common Market Studies 49.2 (2011): 193-217. Print.
Reinhart, Carmen, and Kenneth Rogoff. “From Financial Crash to Debt Crisis.” American Economic Review 101.64 (2011): 1676-1706. Print.