THE EUROPEAN DEBT CRISIS: CAUSES AND CONSEQUENCES (original) (raw)
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RePEc: Research Papers in Economics, 2014
* I am grateful to James Galbraith for helpful comments on an earlier draft. The usual caveats apply. 1.-INTRODUCTION In late 2009, the then recently appointed Greek Prime Minister George Papandreou announced that previous governments had failed to reveal the true size of the nation's deficits. Greece's debts were larger than had been reported. 1 After that, the Portuguese, Spanish and Italian public debts also became a matter of concern because their government debt/GDP ratios were near to the Greek one. The European sovereign debt crisis had started. This paper is organized as follows. Section 2 analyzes the origin of the crisis in these European countries. In Section 3, the specificities of euro debt are discussed. Section 4 analyzes the case of Ireland whose debt crisis preceded the Greek one. Section 5 is devoted to the latter. The role of a single currency on regional imbalances is underlined in Section 6. The case of Spain is analyzed in Sections 7 and 8. Section 9 is devoted to the analysis of the Italian case. Section 10 summarizes the findings of the paper and concludes. 2.-EVOLUTION OF COUNTRIES´ INDEBTEDNESS A first question has to do with the origin of the European debt crisis. Some people have pointed their fingers at the American financial crisis. "This crisis was not originated in Europe," claimed the EU Commission President Jose M. Barroso, who added: "This crisis originated in North America and much of our financial sector was contaminated by… unorthodox practices from some sectors of the financial market." 2 However, as we shall see, Greece and Italy were already heavily indebted as early as 1996, long before the US financial crisis blew up. However, this does not exclude the possibility of some connection between both crises, which is explored below by comparing the debt situation before and after 2007. A second question is how the debtor country governments as the Greek one became so highly indebted. A common explanation for this has been the following. 3
Key Factors Behind the European Debt Crisis
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This paper analyzes the main macroeconomic indicators since 1995 in selected European Union countries as well as in the eurozone. Based on a comprehensive comparative analysis of net international investment position, current account and the debt level in some sectors of the economy, the paper found that there is a trend towards a divergence process instead of the intended real convergence process in the EU countries. In addition, in line with the present significant deterioration of public finance, the paper provides a comparative analysis across the individual countries in the eurozone. The study came to the conclusion that countries that lost their competitiveness had external deficits, which caused fiscal deficits, including public debt. Since the creation of the European Union these countries have ignored the rules set out in the Stability and Growth Pact, which has led to fiscal unsustainability. In order to put the economy on a balanced, sustainable and strong economic growth...
A Review of European Debt Crisis Causes and Consequences
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This paper researched on the causes, current consequences and potential implication of the European debt crisis. The crisis was found to be a result of factors including international trade imbalances, the effects from the global crisis 2007-2012 and the failure in bailout approaches to cure Europe from the global financial distress. This has caused panic across the world due to the fact that negative financial situations in peripheral countries in Europe might further demolish the global financial markets. Even though significant growth was presumed from the introduction of Euro, the financial crisis resulted in sharp rise in bond yields, CDS, cross-correlation and spillover effects across bond markets of the Eurozone. Yield curves of the GIIPS countries acted as a cluster; differentiating from stronger and more stable economic forces. In addition, crisis resulted in significant dip of market confidence on Euro and depreciation of Euro against major currencies. Commodity prices i.e. spot price of gold rose to almost 300% over the time crisis period, utilized by governments as a defense mechanism against the economic downturns. Potential problems that might arise from this severe crisis and financial prospects of European states as well as governments over the world are also assessed and discussed.
Lessons and Implications from the European Sovereign Debt Crisis
The European sovereign debt crisis entered into the stage of contagion in the late 2010 as it spread first from Greece to Ireland, and then to Portugal and Spain. The European sovereign debt crisis truly resulted from a combination of various factors, some as more precipitating causes while others as more fundamental or deep-rooted causes. They include easy credit expansion during the 2003-2007 period, the global financial crisis and subsequent global recession of 2008-2012, fiscal and trade imbalances of the European countries involved in the crisis, and inherent structural problem of the EMU. From the experience of the European sovereign debt crisis, we could confirm some early warning indicators of a crisis such growth of domestic private credit and public borrowing, worsening government balances as well as external balances. Long-term interest rate spreads and an increase in fees charged by investment banks for bond issuance would be precipitating or concurrent warning indicators for a crisis. Implication from the European sovereign debt crisis for the euro area or potential economic and financial integration of East Asia is not necessarily to disband, break up or abandon a monetary union. Instead, a better alternative is to remedy problems and shortcomings exposed by the current crisis and to move toward a deeper integration. JEL Classifications: F34, H12
EUROPEAN DEBT CRISIS – GENESIS AND IMPLICATIONS
European debt crisis cause disruption of the Macedonian financial sector, which was manifested by a decline in real GDP, decline in exports, tightening of financing and increased debt. The problems are even greater if we know that the European crisis was followed by the global financial crisis of 2008, whereby may state that devastating effects are even greater and more destructive on euro scale but also in the Macedonian economy, too. Issues about the effects of the European debt crisis are very interesting and actual because, there are still not finished and may accumulate negative outcome for both, the European Union and the Republic of Macedonia. The main objective of this thesis is to investigate the problems and future challenges generated by the European debt crisis on the Macedonian financial and real sector, which can be ascertained by monitoring the following variables: movement of the real GDP, indebtedness, the trade deficit in the balance of payments. The results shows that regarding current circumstances, Republic of Macedonia should focus on stimulating private sector as the main generator of economic growth, debt reduction and rational spending as well as an increase in lending, i.e. expansionary monetary policy.
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