--%>
Assignment Help - homework help

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 : GDP In calculating the GDP national

    In calculating the GDP national income accountants:

    		•
  • Q : Sources of demand for foreign currency

    State main sources of demand for foreign currency? Answer: The four main sources of demand for foreign currency are as follows: A) To buy services and goods from other countries. B) To send a gift abroad.

  • Q : Positional Goods problem Can someone

    Can someone help me in finding out the right answer from the given options. In accord with the theories of Thorstein Veblen, the positional goods from which the owner or user of the good derives the jollies mainly since of the power, class and status signaled by the p

    		•
  • Q : Problem on rational consumption

    Whenever you dine at an “all-you-can-eat” buffet, the rational consumption prototype is to carry on eating till: (1) The restaurant goes bankrupt. (2) You have eaten as much food as it would encompass cost had you made your own meal at hom

    		•
  • Q : Define Devaluation Devaluation means

    Devaluation means decrease in the external value of a country’s currency as an aware policy measure adopted by the Government of a country. In another words, we make our currency less costly in terms of foreign currency. This builds our goods ch

    		•
  • Q : Shortage of the good Describe when

    Describe when there will be a shortage of the good?

    		•
  • Q : Problem related to rising GDP Between

    Between 1961 and 2007, the rising share of the Canadian population in paid employment contributed to rising GDP per person. But suppose that the share of the Canadian population in paid employment had remained constant between 1961 and 2007. What would Canadian GDP pe

    		•
  • Q : FX rates In June 2005, a Big Mac sold

    In June 2005, a Big Mac sold for 6,000 pesos in Colombia and $3.00 in the United States. The exchange rate in June 2005 was 2,300 pesos per dollar. So, on Big Mac purchasing power parity grounds the Colombian peso was

    		•
  • Q : Purpose of Balance of Payment Meaning:

    Meaning: - as mentioned above, the balance of payments is a periodic accounting of international economic transactions. Each country having regular economic transactions with other countries prepares periodically the final accounts of their foreign receipts and paymen

    		•
  • Q : When Macroeconomic theory least related

    Macroeconomic theory would be least related in analyzing the results of: (w) optional ways of funding deficits in international trade. (x) U.S. federal budget deficits. (y) consumer items purchased through middle-income families. (z) deficit spending through the United Nations.

    		•