The European debt crisis started in 2009
when Greece announced its actual budget deficit was 12.9 percent of the
gross domestic product, more than quadruple the 3 percent limit mandated
by the European Union. Europe was always
a continent with trade barrier, tariffs, and different currencies. In order to
trade between the countries, they have to pay exchange fees to the banks and a
tariff fee. This led to economic stand fall. After the Second World War, 27
countries signed the Maastricht Treaty and created the European Union. Euro
currency was introduced in all Euro areas. This also removed various monetary
policies and developed European central bank, but they had many different
fiscal policies, a key reason for current debt crises.
Before Euro, countries like Greece had to borrow at high
interest rates and limited amount as the lenders were not comfortable to lend. Smaller countries now had access to higher credit never
like before. Lenders now believe that if Greece was unable to repay the loans,
Germany and other big economies would step in and repay them because they now are
part of common currency.
With the abundance of cheap credit, Greece and other
European countries were able to adjust their fiscal policies and increase
spending to previously impossible levels. Some countries embarked on huge
deficit spending programs for politicians to get elected. They made promises
such as more jobs and generous pensions all of it paid with the new money they
could now borrow. The government of Greece, Portugal and Italy accumulated huge
debts however they were able to repay these debts with more borrowed money as
long as the borrowing continued so did the spending and the unbalanced fiscal
policies. In Ireland and Spain cheap credit fuelled housing bubbles just as it
did in united states (subprime crises). Credit flowed, debt accumulated and the
economies of Europe became tightly intertwined. Each country started investing
in other countries within Europe with the credit which was available and the
credit was available until 2008 spurred by a collapse in the US housing market.
a credit swept the globe bringing borrowing to a halt everywhere.
Suddenly the Greek economy
couldn’t function and it couldn’t borrow money to pay for all the new jobs and
benefits that created and it also couldn’t borrow new money to pay its old
debts. This was a problem for Greece but because of the unified monetary policy
it was also a problem for all of the Europe. As each country couldn’t repay the
past debt, they all looked for each other to repay debts and if the all count
pays the economy would go down. All the countries that ran up the bill count
repay everyone looked to Germany.
Thank You
Regards
Author – Rushabh Patel
Kautilya
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