--%>

The European debt crisis

Quetion:

Describe the present economic crisis situation in Europe.   Why has it been so difficult for the Europeans to find a solution to this problem?   Comment on what implications the crisis may have for the rest of the world if Europeans are not able to agree on a solution.

Answer:

The crisis which Europe is facing right now is primarily due to fiscal debt. Due to easy borrowing conditions during most part of the first decade of the 21st century, loans were issued to even subprime borrowers. Financial markets were leveraged, and investors were looking for avenues which yielded more returns than the risk free US treasury bonds. This led to investment in risky and high return yielding assets and markets. During the same time, Greece economy was doing well powered by a substantial fiscal deficit. However, as the global economic upsurge stalled a bit and the economy was hit hard because its shipping and tourism industries faced a downturn. This resulted in a fall in revenues, and there was a rise in the fiscal deficit. The country asked for help from IMF and EU and immediately after this S&P downgraded the debt rating of Greece to BB+. This led to an immediate fall in the value of Euro and the stock markets throughout the world. This led to a lack of confidence among the investors about the economies of the EU countries, and consequently, Ireland, Portugal, Italy and Spain also were hit by the crisis.

The main reason why this originated and persists is the high fiscal deficit which these countries persist with. This is further exacerbated by the lack of growth in these economies. Also, the workers in these economies are highly paid, and there are a range of subsidies assigned to masses. Lack of growth implies that there is not enough employment generation on one hand and an increase in fiscal deficit on the other. This situation is hard to sustain as most of the lenders to these countries are foreign investors who are looking for returns and flee away as soon as risk factors become high.

The financial markets today are more connected and interdependent upon each other than ever. Market runs on sentiments and expectations. Any fluctuation in one major market affects the markets worldwide. So, the European debt crisis has not been limited to Europe in its aftermaths. Investors turn bearish in case of any major setback and that affects their investment pattern overall, which in turn affects other economies/market. So a resolution to the European debt crisis is essential for the global economy, and the failure to reach a consensus on the solution is bad news for the entire world, and not just Europe.

   Related Questions in Macroeconomics

  • Q : State the Income Effect Can someone

    Can someone please help me in finding out the accurate answer from the following question. The Income effects are: (i) Adjustments people make since the purchasing power of the given income is modified whenever prices change. (ii) Adjustments people make since the pur

  • Q : MPC What relationship does the MPC bear

    What relationship does the MPC bear to the size of the multiplier? The MPS? What will the multiplier be when the MPS is 0, .4, .6, and 1

  • Q : IS-KM Model with classical supply

    discuss with the help of IS-LM model why money has no effect on output in classical supply case

  • Q : Foreign trade eliminate deficient demand

    In what respect foreign trade will be helpful in eliminating the adverse economic influences of deficient demand? Answer: Export increases the demand for services a

  • Q : Speculators actions when they are right

    When speculators are right, their actions: (1) Cause already depressed prices to drop/fall further. (2) Raise the risks to another firm of doing business. (3) Prevent price refuses from their peaks. (4) Reduce both the phase of prices and their volatility across time.

  • Q : Market demand curve for new houses The

    The market demand curve for latest houses would rise in response to a rise in: (1) construction technology. (2) The costs of lumber. (3) Housing prices. (4) Legal price ceilings on rental properties. (5) Expectations regarding future housing prices.

    Q : Economics Hello. I need help with my

    Hello. I need help with my assignment, I was sick and lost alot of time.My submission deadline is tomorrow i need your help i have attached the questions Thanks in advance

  • Q : Custodian of nations foreign exchange

    Name the institution that acts as a custodian of nation’s foreign exchange reserves? Answer: The Central Bank is an institution that acts as custodian of natio

  • Q : Are government budget scarcities always

    ‘The country is at present in recession and this has led to worse tax revenue and high expenses. The effect is a huge deficit. The government decides to increase taxes and lower government expenses. Is this an excellent idea?’

  • Q : Development economics Government tax

    Government tax and transfer payments generally