We will write a custom Essay on Factors responsible for the Eurozone debt crisis specifically for you
301 certified writers online
The Eurozone debt crisis is a financial crisis that is currently being faced by some countries in the Eurozone. This crisis has resulted in a situation where these countries found it almost impossible to re-finance the debts that their governments had accumulated or even to repay the debts without outside help from other countries or from other international institutions.
The member countries of the European Union signed a treaty in 1992 to regulate the debt levels that the countries could be allowed to hold. The treaty was referred to as the Maastricht Treaty.
This treaty was meant to ensure that countries did not at any time fail to repay their debts. In the early 2000s however, it was noted that some countries in the EU were not following the guidelines laid down in the treaty. Governments were therefore able to mask their debt levels and deficits through the use of various techniques such as inconsistent accounting techniques, use of complex currency derivatives as well as engaging in off balance sheet transactions (Bergsten and Kirkegaard 25).
Causes of the crisis
There are various complex reasons that led to the occurrence of the Euro crisis and all of them could have been prevented early enough if the governments and the Bretton woods institutions had the will power. Most financial analysts have come to the conclusion that the crisis was fuelled by a set of common challenges that some of the Eurozone countries were going through while at the same time recognising that country specific factors also played a significant role.
One of the major factors that led to the crisis was the inflow of capital into some of the newer countries and the increase in public and private debt that followed over the past decade. In the process of preparing to adopt the Euro as the common currency, their bond spreads reduced significantly as they matched the interest rates in the main Eurozone countries which had better performing and stronger economies.
The adoption of the new currency and the interest rates caused both the public and private sectors to try and take advantage of the cheap credit through increased borrowing. It should however be noted that the capital inflows were not put to productive investments therefore the resources generated from them were not enough to repay the original debts (Bergsten and Kirkegaard 28).
In some of the countries such as Greece, most of the debt that could not be repaid was in the public sector due to poor management of the country’s public funds. In some other countries like Spain and Ireland however, most of the debt was concentrated in the private sector as a result of the real estate bubbles and some banking issues pertinent in the countries.
The rising levels of private debts caused some of the governments like Ireland to shoulder private sector debts through guaranteeing some of the bank debts and also through bank bailouts (Bergsten and Kirkegaard 28).
Some of the other common factors that led to the Eurozone debt crisis include globalisation of international financial markets as a result of the development of information technology and access to cheap credit and easy conditions which led to banks lending to high risk borrowers who were subsequently not able to repay their loans.
Another factor that led to the crisis is the global financial crisis which occurred in 2008 where most borrowers were not able to repay their debts as a result of the shutdown of global capital markets. The property bubble is also said to have led to the crisis as these bubbles later burst leaving individuals with loans that they could not service after the value of their homes deteriorating to very low levels.
The governments of these countries also adopted poor fiscal policies relating to revenues and expenses and therefore the governments ended up incurring expenses that could not be supported by their revenues. The action that most of these governments took to bail out the volatile banks as well as the private debt holders was also another major cause of the Eurozone crisis (Bergsten and Kirkegaard 30).
It should be noted that although capital inflows was the main cause of the Euro crisis, some factors that were specific to each country also significantly led to the crisis in their own ways. For example, the government of Greece has been accused of practising poor management of public funds for several decades. The country has also been accused of encouraging high government spending on non priority areas such as public sector jobs which leads to strained finances.
Another characteristic of Greece that led to the crisis is the fact that the country is faced by very high levels of tax evasion. Ireland on the other hand was affected as a result of the oversized nature of its banking system. The government moved to intervene and gave a guarantee for the Irish banks which led to more than 30 percent of government deficit. This deficit subsequently led to an increase in the levels of public debt by more than 40 percent (Rebecca et al. 5).
The economy of Portugal is characterised by a lack of competitiveness and was therefore ranked as the slowest growing economy among all the European Union countries during the decade preceding the financial crisis. This reduced the effect of the crisis on the country’s economy. In the mid 2000s, the economy of Spain was characterised by low public debt as well as a budget surplus.
Get your first paper with 15% OFF
However, the boom period led to in increased capital inflows due to heavy borrowing by the private sector ad individuals which caused an unrealistic real estate bubble. This eventually led to the crisis as the economy could not support the high levels of debt. Finally, Italy has been known to have high public debt for a long time and has recorded debts that exceeded the country’s GDP by over 100 percent. This made the country vulnerable and therefore when the crisis broke, it was affected adversely (Rebecca et al. 8).
From the discussion carried out above, it is evident that the Eurozone debt crisis was caused by common factors across the member states, as well as country specific factors. The debt crisis was therefore as a result of practices that had been carried out for quite some time by both the governments of these countries as well as by the private sector.
It is important to note that the crisis would have been averted early enough if the government and other policy makers had put up measures to regulate the amount of debt that countries could be allowed to incur as well as public access to credit facilities.
Bergsten, Fred, and Jacob Funk Kirkegaard,. “The Coming Resolution of the European Crisis: An Update.” Petersen Institute for International Economics. 6.1 (2012): 25-30. Print.
Rebecca, Nelson, Paul Belkin, Derek Mix and Martin Weiss. “The Eurozone Crisis: Overview and Issues for Congress.” Congressional Research Service. 9.2 (2012): 5-9. Print.