Sovereign debt crisis hits Europe?

Sovereign debt crisis hits Europe?

Sovereign debt crisis hits Europe?

It passed a year since the first voices of concern were heard. Then there were few people to think that a debt crisis could hit large European economies. The financial crisis from 2008 put the pressure on the banking systems and many countries decided to bail out their financial systems by increasing sovereign debt.

In 2010 the debt crisis hit Greece, a member state of the eurozone. A €110 billion loan from International Monetary Fund (IMF) and EU members was expected to solve the problem in Greece as the country agreed to implement harsh austerity measures.  Another two huge loans followed: a €85 billion for Ireland in November 2010, and a €78 billion loan for Portugal in May 2011.

Greece’s problems are far from over and now the default seems difficult to avoid. As Greece is one of the EU members that adopted the euro as national currency, a default is expected to affect the euro and the trust in eurozone economies. The investors could lose their trust in European economies withdrawing the capital invested making other countries vulnerable to debt crisis.

Portugal, Ireland, UK, Italy and Spain also have high sovereign debt levels and deficit issues but their governments try their best to keep them out of the woods. All these countries are vulnerable to euro so a steady common currency is needed to help improve their economic situation.

There are some long term solutions circulating in the international economic environment. These include the creation of the European Financial Stability Facility (EFSF), the creation of the European Treasury or the two currencies solution.

The EFSF was created in 2010 and in January 2011 issued the first bonds. The five-year bonds totaling €5 billion were part of the financial support for Ireland but did not improve the economic situation in eurozone.

The European Treasury would supervise the tax policies and the governmental spending of the EU members. The European Commission already done that but with no positive results due to economic independence witch every EU member country still has.

The two currency solution is the most controversial and many economists say that is too late to go there. To create a new currency would take some time so it might be too late to help.

The future of euro and European Union is nowadays uncertain and only time will tell if the euro will recover after its first major crisis.

Both comments and pings are currently closed.

Comments are closed.