Eurozone Crisis

What is Eurozone Debt Crisis?

The Eurozone Debt Crisis is an economic crisis due to the

collapse of financial institutions, high government debt, and

rapidly rising bond yield spreads in government securities

faced by several European countries. The European sovereign

debt crisis started in 2008, with the collapse of Iceland's

banking system, and spread primarily to Greece, Ireland and

Portugal during 2009. This led to a crisis of confidence for

European businesses and economies.

Members of the Eurozone with joining year

• 1999 : Austria, Belgium, Finland,

France, Germany, Italy, Ireland, Luxembourg, Netherlands, Portugal, Spain

• 2001 : Greece

• 2007 : Slovenia

• 2008 : Cyprus, Malta

• 2009 : Slovakia

• 2011 : Estonia

What led to the Crisis?

• Years of unrestrained spending

• Cheap lending and failure to implement financial reforms

• The national debt of Greece

• The Appreciation Bias of the Euro = loss of competitiveness in the margin

• Lack of a centralised budget to overcome asymmetric shocks

• Real Estate bubbles, especially in Spain and Ireland

• Lack of jurisdiction on derivative markets and credit rating agencies

• Lack of supervision in the levels of private debt, and asset bubbles

Causes of the Eurozone Crisis

Impact on Indian Economy

• Negative impact on the Indian stock market

• Severe macro-economic impact

• India’s export to the European region affected

Greece Debt Crisis: An insight

Why Greece is in the midst of a debt crisis

• Accumulated high levels of debt before financial crisis when the market was highly liquid

• Deepening of crisis creating liquidity crunch in world economy.

• Difficult and expensive borrowing

• Excessive Expenditures

• Unregulated Labor

• Market Obsolete Pension System

Measures Taken by Greece

• Budget cuts- almost up to 14 %

• Austerity measure taken to reduce deficit:

- Hiked taxes on alcohol, tobacco and fuel

- Increased the retirement age by 2 years

- Public sector pay cuts

- Strong new tax evasions regulation

Effects of the Eurozone Crisis on economy

Euro-Dollar Exchange Rate

Imbalance in the Current Account Balance

What can be done?

Immediate reforms are needed in five key areas:

– ECB must become a Lender of last resort

– Eurozone debt sustainability and growth

– Domestic reform in crisis countries

– Eurozone governance

– A return to serious financial sector reform

Conclusion

• The crisis will not cease till all the debt obligations in euro-zone are cleared. European countries are dependent on each other, so the countries are unable to repay the debt borrowed from other countries . Therefore the lender is in a threat of going into debt crisis.

• The Eurozone needs to create a ministry of finance with the creation of Eurobonds.

• Macro-economic co-operation is need in order to avoid internal imbalances.

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