2. The EUROZONE officially called the euro area, is a monetary union of 19
of the 28 European Union (EU) member states which have adopted
the euro (€) as their common currency and sole legal tender.
The EUROZONE consists of :
Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland
, Italy, Latvia, Lithuania, Luxembourg, Malta,
the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
3. Formation Of The EUROZONE
There were a lot of tariffs, trade Barriers,
restrictions on trade in various European
countries prior to 1945. Also, there was fee
on currency exchange .
However, after the World War II, which
devastated Europe, several trade barriers
were gradually removed to recover from the
impact. The removal of the BERLIN WALL
resulted in the formation of THE EUROZONE ,
with a common currency EURO and a
Monetary Body – THE EUROPEAN CENTRAL
BANK.
4. The EURO is the Currency of 19
EUROPEAN Countries .
It came into use on 1st January,
1999.
It was approved by all the
countries through the Maastricht
Treaty. The main aim for the
unification of the currency as Euro
was to promote exchange.
5. It is the breakdown in the value of Euro.
The European debt crisis (often also referred to as the Euro zone crisis or
the European sovereign debt crisis) is a multi-year debt crisis that has
been taking place in several euro zone member states since the end of
2009. These states (Greece, Portugal, Ireland, Spain, Cyprus) were unable
to repay or refinance their government debt or to bail out over-indebted
banks under their national supervision without the assistance of third parties
like the ECB, or the IMF.
The European debt crisis erupted in the wake of the Great
Recession around late 2009, and was characterized by an environment of
overly high government structural deficits and accelerating debt levels.
6. The Euro Debt crisis – In depth
The euro zone countries abolished their monetary policies(
interest rates, borrowing capacity) and gave the control of the
same to the ECB.
However the countries retained their fiscal policies(taxes,
government expenditure)
As a result, small countries could now borrow greater sums of
money from European banks at lower interest rates.
This had a negative impact in countries like Greece, where
people don’t pay appropriate taxes. Government increased
their spending/expenditure.
Now , this country was spending more than what it collected
as taxes through borrowings[Deficit Spending]
Deficit Spending Programmes included more jobs, higher
pension and retirement Benefits.
7. They were able to repay these debts with further borrowings
from financial institutions of other European Countries .
This result in an inter-twined European borrowing circle.
The major countries involved in similar borrowing cycles:
Spain, Portugal, Ireland and Cyprus.
8. However with the US Recession crisis of 2008, borrowing came to a halt.
Small Economies like Greece and Cyprus could not function, as it didn't
have any money to undertake development programmes and couldn’t
borrow any money to repay its existing loans or debts.
As the economies were tightly inter-twined, with Greece’s collapse, other
economies began to collapse- Spain, Portugal, Ireland And France.
However, one of the countries had to take up the responsibility to repay the
debts to avoid the collapse of the European Union, that country being the
European Superpower , GERMANY
9. Germany reluctantly agreed but also put forward certain AUSTERITY
MEASURES
Austerity measures means cutting down Government Spending,
Borrowing Less and paying more debts.
But, when the Government spent less, people of the nation Earned
Lesser Income and Protested which led to widespread RIOTS.
When the defaulting countries could not repay Germany, the whole of
the European Union crashed. Germany’s Creditors could not be repaid
as Germany did not have sufficient income. For this Brief period of 3-4
years, the whole world went into recession.
10. Causes OF European Crisis
• Monetary Policy :Membership in the Euro zone established a
single monetary policy, preventing individual member states from
acting independently. In particular they cannot create Euros in
order to pay creditors and eliminate their risk of default. Since they
share the same currency as their (euro zone) trading partners, they
cannot devalue their currency to make their exports cheaper, which
in principle would lead to an improved balance of trade, increased
GDP and higher tax revenues in nominal terms.
• The Recession of USA: However with the US Recession crisis of
2008, borrowing came to a halt. Small Economies like Greece and
Cyprus could not function, as it didn't have any money to undertake
development programmes and couldn’t borrow any money to repay
its existing loans or debts.
11. Different Fiscal Rules: In the Euro zone system, the countries are required
to follow a similar fiscal path, but they do not have common treasury to
enforce it. That is, countries with the same monetary system have freedom
in fiscal policies in taxation and expenditure. So, even though there are
some agreements on monetary policy through the European Central Bank,
countries may not be able to or would simply choose not to follow it. This
feature brought fiscal free riding of peripheral economies, especially
represented by Greece, as it is hard to control and regulate national financial
institutions.
Excessive Borrowing: Countries Like Greece started lot of deficit spending
programmes such as retirement pensions, more number of jobs . The
amount spent was much higher than the amount they received as taxes.
Therefore, the debts continuously increased.
Loss of confidence : When countries like Greece started defaulting its
creditors, financial institutions lost their trust on the Euro-Zone Countries.
This enhanced the crisis.
13. Fiscal Union: A fiscal union can be
established in Europe which prevents
excessive Borrowings , Cuts Down
Governtment Expenditure, formulates rules
and regulation on tax.
Austerity Measures have to be followed to
handle the crisis initially. This will help the
defaulting countries raise funds to repay their
debts and will ensure that such a situation
doesn’t show up again.
Payment of Taxes: Citizens should pay
appropriate taxes based on his/her income to
the Government.