The European Debt Crisis has been one of the most adverse economic tragedies for the world since the end of 2009. The impact of the crisis is still evident in the world economy characterized with ongoing strategic complications and uncertainty. As the problem directly or indirectly has affected the world community as a whole, it is important to explore the reasons and consequences of the crisis from a monetary economic perspective. The paper will also identify the interdependence of fiscal and monetary policy with regard to the crisis.
The debt problem could be attributed to so many complicated factors related to Eurozone. For instance, the formation of monetary union (Euro), without uniting the fiscal policies of the member countries was one among them. European Union failed to ensure that the member states had been properly obeying EU’s rules and regulations. Another fatal mistake was that during the crisis EU accepted the high budget deficits by many countries. The global recession has also contributed to the issue to a great extent. The immediate result of the debt crisis was that the bank’s liquidity problems weakened the overall lending and economic growth (ACCA 2012). The loans given to both governments and private organizations had assumed certain levels of growth by when the expectations failed and problems arose (Ibid). Once the repayment of debts failed, banking sector became unable to defend the whole European economy.
The situation affected the bond market as well because of the rating agencies’ unfair involvement. The government became unwilling to raise money because of the distrust on creditors about the payment. European Politics also played a great role in intensifying the dept dilemma. Different political ideologies created conflicts between the decision makers. To illustrate, Germany took up an austerity-led strategy to deal with the crisis protesting against the anti-austerity parties. The decision was impractical and the authorities or leaders could not take relevant measures at the right time.
As Romeo (2010) reports, the Greek government requested the activation of EU/IMF bailout package. The Greek debt rating reached BB+ (a junk status) due to the strategic failures of the Greek government. According to many economists, high government spending, weak revenue, high salary, low productivity, low export growth rate, and tax reversion were the primary causes of Greek financial crisis. The higher intensity of the Greek debt crisis adversely affected the euro’s foreign exchange rate value even though Greece constitutes only 2.5% of the euro zone economy. Another fact was that the Greek debt crisis raised deficit challenges to European countries that had had invested in Greece.
The Irish government officially declared in September 2008 that the country was in recession. The nation experienced a steep fall in employment in the following months. According to records, in January 2009, 326,000 Irish people claimed unemployment benefits (Labour and the totemic gesture, 2011).
The Irish financial crisis (2008-2011) severely affected Euro debt markets. This situation led to a sudden decline of the euro value across all European countries. As a result, European Central Bank was forced to raise its interest rates. The euro debt market could not easily overcome the situation despite various policies introduced by regulators. Due to this debt market crisis, foreign investors hesitated to invest in Euro countries.
In order to become capable of handling future problems, the European Union attempted to increase the minimum level of bank capitalization (ACCA 2012). To provide loans to the European countries, the EU formed European Financial Stability Facility (EFSF) and later developed a mechanism in conjunction with both EFSF and Internal Monetary Fund (Ibid).
The European Central Bank decided to assure low interest rates to boost economic growth. It also tried to solve problems regarding liquidity by bringing government and private debt securities to the open market. But ECB did not consider other important options like forming fiscal union or banking union. International Monetary Fund also has been lending money in appropriate manner.
According to Morris Goldstein, a former deputy director of research at the IMF, the disaster would have been worse if the IMF was not doing anything to address the issue (Eving 2013). IMF had insisted that the aid recipients must cut government spending and raise taxes. However, according to Ms. Lagarde, the Managing Director of IMF, relying exceedingly on austerity could bring negative effects; and she thinks that Greece and Portugal should follow only a moderate level of austerity (Ibid).
The European Commission proposed a financial transaction tax system The European Union financial transaction tax (EU FTT), which would impact financial transactions between financial institutions. This proposal has been a bone of contention among EU members since its announcement in 2010.
Although regulators believe that the policy has the potential to raise nearly 57 billion Euros per year, the tax system will not have an impact on citizens and businesses, because EU financial transaction tax is different from a bank levy. Hence, proponents of the proposal claim that FTT on secondary financial products would protect the real economy as it does not affect transactions including salary payments and household loans.
Evidently, the taxation policy would be beneficial for cities and other regions to find a new source of revenue. According to Whyte (2012), unilateral cuts in public spending would adversely affect the economic activities of the EU, and therefore, improving revenues is the only strategy to pull the EU out of the economic crisis. Also, the proposed taxation policy would discourage risky trading activities, the prime cause of the current economic crisis.
Financial strategies initiated by the Greek government also adversely impacted the advancement of euro debt market. Many of its economic policies seriously affected the trade relations between the US and the European countries. Since the Greek government had borrowed over 110 percent of the country’s output, the investors lost their confidence in bonds, and this situation affected the euro debt markets.
In total, Euro Zone crisis has been a major threat to the European Economy for the past few years. It is important for European authorities to collaborate and find a permanent solution. The issue has been the result of wrong monetary policies to a great extent. However, latest assumptions made by the experts seem to be on the right track. Although the European Union and its Institutions have saved the economy in several respects, they yet have to advance much. Euro Zone countries have to move honestly and violating rules should be considered as a very serious mistakes.
References
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Beesley, A. 2013 “President Higgins intervenes in political debate on euro zone debt crisis”. The Irish Times, May 2. [online] available at <http://www.irishtimes.com/news/politics/president-higgins-intervenes-in-political-debate-on-euro-zone-debt-crisis-1.1379773> [accessed 14 March 2016].
Eving, J. (2013). Euro Zone Crisis Has Increased I.M.F.’s Power. The New York Times, April 17 [online] available at <http://www.nytimes.com/2013/04/18/business/global/euro-zone-crisis-has-increased-imfs-power.html?pagewanted=all> [accessed 14 Marchy 2016].
Labour and the totemic gesture. (Aug 24, 2011). The Cedar Lounge Revolution. [online] available at: http://cedarlounge.wordpress.com/2011/08/page/3/ [Accessed 14 March 2016].
Romeo, L. (2010). “Romania and Greece: Together or alone against the present global crisis”, African Journal of Business Management 4(19): 4191-4198.
Whyte, P. (2012). ‘Why an EU financial transactions tax is a red herring’, Center for European Reform. [online] available at: http://www.cer.org.uk/publications/archive/bulletin-article/2012/why-eu-financial-transactions-tax-red-herring [Accessed 14 March 2016].
