Posted in Finance, Accounting and Economics Terms, Total Reads: 230
Definition: European Sovereign Debt Crisis
European Sovereign Debt Crisis was the failure of European currency that tied together 17 European countries. Eurozone includes the countries under European Union and have adopted euro as their main currency. Greece, Portugal, Italy, Ireland, Spain were the main culprit for European debt crisis which brought down the whole European economy.
European union was made to reduce the high tariff fees to be paid and to increase the trade between European economies and remove the barrier of different currency and 27 countries signed the Maastricht Treaty and then unified European was formed . Countries in European unions was having same monetary policy but different fiscal policy which was the matter of concern and one of the major reason for European Sovereign Debt Crisis.
Greece, Portugal, Italy, Ireland, Spain were have to pay high interest rate to get loans which was decreased drastically after European union was formed as all the countries were given the same treatment to all the countries as the treatment the Germany was getting . Germany acted as the credit card for all the other Euro zone countries. Other countries deficit was increasing as a result debt was increasing and because of more borrowed money people were spending more.
All the European union countries were tightly intertwined and this continued till 2008 and the House bubble burst and Greek economy stop functioning and since the countries were having unified monetary policy, it became the problem of whole European economy .Germany reluctantly agreed to bailout the countries in trouble but the countries have to adopt strict austerity measures so that these does not happen again in the future again But because of cultural differences , Germany was financially stable and sincere economy where as on the other side Greek believed in prosperous life and hence had high spending and kept on borrowing money and hence credit crunch was there once again
As a result of bailout, economic growth and structural deficit were improved Ireland and Portugal were out of bailout program in 2014 and Greece and Cyprus has recovered to some extent and expected to recover by the end of 2016. Spain is the only economy who never received any bailout and is severely hit in this crisis.
The above graph shows the year wise real GDP% change in European companies.