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The EU Crisis from the Problem to the Solution (maybe) Part 1 of 2

Autore: FX Empire Analyst - Barry Norman

The EU Crisis from the Problem to the Solution (maybe) Part 1 of 2

The EU Crisis from the Problem to the Solution (maybe) Part 1 of 2

The Birth of the European Union

The EU which consists of a group of 27 nations, with a unique economic and political partnership between the nations, is regarded as the largest economy with a total GDP of about US$ 17.578 trillion in 2011 according to the International Monetary Fund. The EU was formed in 1957 with the objective of earning the benefits of common trade and economic cooperation. For the internal markets to prosper a much closer economy and monetary cooperation was felt which ultimately lead to growth of the entire European group. Thus, in 1991 the group agreed on treaty for the unification of the European nations.

The “Maastricht treaty” decided that the European group would introduce a single, strong and stable currency from the 21st century. It was felt then that not only would the mass population benefit but also the entire economy from the single currency. On January 1, 1999, the currency came into official existence and 17 nations of the eurozone began using the – Euro.  The single currency and market is the main economic engine of the EU which enables its goods, services, money and people to move freely.  To join the currency the member nations needed to satisfy a set list of perquisites

The beginning of the crisis……..

The currency enjoyed numerous benefits, the other monetary policies which as separate economics acts as impediments for the growth but problems surfaced as the Union was facing crisis underscoring the flaws behind the common currency.

The European policy makers have been busy rushing to find the solutions which had erupted from the debt woes of PIIGS (Portugal, Ireland, Italy, Greece and Spain). These sovereign and banking system risk have not developed overnight but have been present for the long time. It is only under the stress from a recession that the flaws began to shift and developed in to breaks.

It all began with the property bubble of the Dubai along with slower global economic growth since the U.S. financial crisis in 2008-09 which made the inconsistent monetary policies of the Europe to come to the forefront.

The crisis spreads………

Greece an important nation in the group had been increasing its fiscal spending for several years and abandoned fiscal reforms was the first to feel the problems of slow down in the economy. Slower growth leads to decline in the tax revenues thereby raising the fiscal deficit.

Signs of the crisis started in April 2009 with debt of some of nations such as France, Spain, Ireland and Greece soaring which led the EU to instruct them to reduce their budget deficit. Budget deficit is a phenomenon where in the government spending is more than the revenues generated. 

In November and December 2009 concerns grew in Greece when its Finance Minister Mr. George Papaconstantinou‘s stated that its predecessors had concealed enormous deficits and underlined its inability to pay the debts. Greece debt rose to highest level to about 113 percent of its GDP that is double the Euro zone limit of 60 percent. This had a ripple effect when investors started to ask higher yields for the bonds issued by the government simultaneously increasing the fiscal deficit due to high borrowing costs. Governments of the region had to eventually ask for the bailout package.

Contagion spreads…

Since the economies were integrated this acted as a contagion as it spread to other regions like a fire and a series of bailouts were noticed by the EU and European Central Bank (ECB).

Thus, in early 2010 the Greek government took widespread austerity measures to curb the spirally debt. Austerity measures cut down the national deficit by reducing the public expenditures. Borrowing costs in Greece reached to record highs and nation became the focal point of all crises. Finally, to stall the alarming debt of the nation, the EU members along with International Monetary Fund (IMF) provided aid to the ailing Greece.

Thereafter a series of rescue aid was granted to the Greece and some others in the group which proved to be futile to stem the debt which had evolved from the high borrowing costs The last meeting held by the European Union leaders in the month of March 2012, lead to formation of a treaty for fiscal stability, coordination and governance designed to adopt tough budget discipline and to compel governments to implement balanced budgets through a “golden rule”, denial of which would lead to fines. All 25 European Union members signed the treaty except the United Kingdom and the Czech Republic.

Cyprus, a member nation of the European nation became the fifth country to seek out for the bailout just a week ago. Earlier stimulus or bailouts had been granted to Greece, Spain, Portugal, Ireland.  

We have also noticed that with any unfavorable news with respect to Euro debt crisis entire global markets witnessed a down turn. Thus, it became crucial to arrive at a material solution which would be a beneficial for the all the members of the European nations along with the other nations outside the Euro who have economic ties with the EU.  A positive outcome would have a long term impact on the global economy as all the nations of the world are integrated with each other due to globalization and would overall boost the economic growth of the some of the major developed economies such as U.S and China.


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