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The European Debt Crisis is now a major international
problem. It has serious ramifications for the economies of all countries
involved. But the question is, how did the debt crisis start? How did Greece,
as well as other major European countries fall into such massive debt? Why was
Greece so strongly affected? Many blame Greece for this problem; however, it
was the situation surrounding the implementation of the European Union and the
Euro and the Financial Crisis of 2008 that caused the countries to be in such
massive debt in the first place.
To realize
why so many countries were affected by the crisis, one must look at the reason
why they were so closely connected. The European Union connected all the
countries in the Eurozone together. Its aim was to create a union that would be
prevention for wars in the future. This is not surprising considering it was
started shortly after the Second World War. In fact the motto of the EU says it
all: “United in Diversity”. The founders of the European Union sought to create
an economic and monetary union between countries that had joined. The countries
would also be united by trade, which later included sharing the same currency.
It was believed that this would contribute to peace and prosperity of the
nations of the European Union. (Europa.eu)
The
implementation of the Euro paved the way for all European countries to be hit
by the hard times. The Maastricht Treaty, which was signed in February 1992,
was the beginning of the European Union as we know it. For countries to join,
they must agree upon three major “convergence criteria”. First, countries must
insure stable low inflation. Second: the country’s debt cannot exceed three
percent of their GDP, and their total sovereign debt cannot be above 60%. Third:
a country’s exchange rates must be stable before entering. Joining meant that the countries would share
the same currency: the Euro. Joining the union brought huge economic benefits;
nations that had lower credit ratings could still borrow money at the same rate
as all other countries. There was no enforcement ready to stop a country if it
failed to meet any of these standards. In this way, the Euro allowed for large
sums of borrowing money at low rates, allowing massive debts to pile up, with
no enforcement that they would go away. (Voss) Because the countries were so
intermingled now, any hardship would affect them all.
This
hardship came in the form of the Financial Crisis of 2008, which caused the
world to go into a depression. Its major causes were the burst of the housing
bubble, which affected the collapse of major banks. The housing bubble is when
there is an increased demand with low interest rates, causing for a need for
more supply. When the supply is finally made, in this case houses being built,
interest rates become high, and demand drops. The supply is still high, and
those with mortgages have an extremely hard time paying them off. When major
banks and corporations bet on the wrong side in this situation, lending money
without it getting paid back, they became on the verge of bankruptcy. (Furrier)
The Lehman Brothers bank, the fourth largest U.S. bank, was extremely effected
by the housing bubble, and filed for bankruptcy in 2008 (Investopedia) Banks in
this day are not centralized to one country, they spread out over the world,
and if they fail, have international effects. (Landler) The collapse of the
Lehman Brothers as well as other international corporations intensified the
financial crisis. It is interesting to note that both the Great Depression and
the Financial Crisis of 2008 originated in the United States. Still both affected
the world’s economy. This goes to show how connected the US is in trade and
relations with other nations.
Many agree
that the “start” of the European Debt Crisis began with Greece announcing its
debt. To be accepted into the European Union, Greece stated that it had a debt
of 1.7% of its GDP, when in actuality it had 4.6%. (Voss) Greece’s government
spending was huge. With the Euro, they could borrow money at low interest rates
without enforcement. Public sector wages actually increased, and Greece’s
government spent a huge amount on the 2004 Athens Olympics. At the same time,
Greece was not making that money back because of widespread tax evasion by
companies. Basically, Greece spent a lot more money than it made. When the
global financial crisis occurred, Greece was already not prepared to take the
economic shock. Debt levels were then so high that Greece could not repay its
debt and was forced to ask for helm from other European countries. (BBC) On
November 5th 2008, Greece finally reported that their debt was 12.7%
that of their GDP.
Other
countries were hit just as hard. The countries that are in the worst debt are
often called by the acronym PIGS (sometimes PIIGS to include Italy). This
includes Portugal, Ireland, Greece and Spain. The recession and debt has also
affected the cultural life of the countries. The unemployment rate is up
drastically, (Spain’s youth unemployment rate is 56.1 percent) which has
resulted in numerous strikes and public discontent that have affected the
government’s stability. (Burgen) Even though many attempts, for example bailout
plans including large loans, have been made to solve the problem, there will be
lasting effects from the European Debt Crisis.
BBC. Eurozone crisis
explained. BBC News. 27 Nov 1012. Web. 30 Sep 2013. <http://www.bbc.co.uk/news/business-13798000>
Burgen, Shephen. Spain
youth employment reaches record 56.1%. The Guardian. 30 Aug 2013. Web. 30
Sep 2013. <http://www.theguardian.com/business/2013/aug/30/spain-youth-unemployment-record-high>
Europa.eu. The History
of the European Union. European Union. Web. 30 Sep 2013. <http://europa.eu/about-eu/eu-history/>
Furrier, John. Bottom
line: The financial Crisis Explained. Furrier.org. 20 sep 2008. Web. 30 Sep
2013. <http://podtech.wordpress.com/2008/09/20/bottom-line-the-financial-crisis-explained/>
Investopedia. Case
study: The Collapse of the Lehman Brothers. Investopedia. 2 Apr 2009. Web.
30 Sep 2013. http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp
Landler, Mark. The
U.S. Financial Crisis is Spreading to Euope. The New York Times. 30 Sep
2008. Web. 30 Sep 2013. < http://www.nytimes.com/2008/10/01/business/worldbusiness/01global.html?_r=1&>
Voss, Jason. European Sovereign
Debt Crisis. CFA Institute. 21 Nov 2011. Web. 30 Sep 2013. < http://blogs.cfainstitute.org/investor/2011/11/21/european-sovereign-debt-crisis-overview-analysis-and-timeline-of-major-events/>
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