Eurozone Crises

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Apurva Dhamankar

12/1/20222 min read

What was the eurozone sovereign debt crisis?

The eurozone crisis happened due to the countries who have accepted the euro as the currency started having trouble paying their government debts. This crisis showed the dangerous shortcomings eurozone in regulating measures that governed the eurozone’s shared economy.

It began in 2009, when the world realized that Greece might default on its debt. In the next three years, the countries like Portugal, Italy, and Spain were also on the verge of sovereign debt defaults. This crisis was the world’s greatest threat in 2011 according to Organisation for Economic Corporation and Development. The crisis got worsened in 2012. Between March 2011 and May 2012 more than half of the eurozone’s members saw their government balance of payment collapsing. The European Union struggled to support these members, led by Germany and France.

The initial help to save these countries financially came from the European Central Bank (ECB) and the International Monetary Fund (IMF), but their help did not prevent many from questioning the Euro's stability and growth. In 2013 the Eurozone owed more than 10.48 trillion dollars to the world.

After President Trump threatened to double tariffs on Turkish aluminium and steel imports in August 2018, the Turkish lira fell to a record low against the US dollar, reigniting fears that the Turkish economy's poor health can create another eurozone crisis. Many European banks have holdings in Turkish lenders or have made loans to Turkish firms. The defaults can create a significant impact on the European economy.

Causes of eurozone sovereign debt crisis:

  • No restrictions were set for countries that violated the debt-to-GDP ratios set by the EU's founding Maastricht Criteria.

  • There was increased spending by France and Germany and therefore it would be partial to sanction others until they got their own houses in order.

  • Countries in the eurozone drew immense benefits from the Euro's power such as low-interest rates and increased investment capital.

  • Strict measures were quite restrictive which led to a decrease in economic growth.

  • There was an increase in unemployment, due to which consumer spending was cut back, and this reduced the capital needed for lending.

Measures undertaken:

Measures Undertaken to tide over the Eurozone Sovereign Debt Crisis:

  • To launch quick-start programs to help businesses and start-ups.

  • To bring together apprenticeships and vocational education targeted toward youth unemployment.

  • The emergence of special funds and tax benefits to privatize state-owned businesses.

  • Increased investment in renewable energy.

  • Making Special Economic Zone (SEZ) like China.

Thank you.

Regards,

Poojan Thakkar,

Kautilya, IBS Mumbai.

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