The Current International Debt Crisis and the Implications for the EU Essay
The Euro-zone is facing a major debt crisis which paints a grim picture of the future of the European integration. Although extensive efforts have been put forward by the governments concerned, a solution does not seem forthcoming. The current debt crisis in the Euro region has led to serious political paralysis. Indeed, the European Integration project seems to be fast getting difficult to manage endangering not only the region but also the global economy. The sovereign debt crisis in the Euro region started in early in 2011 (Shapiro, 2009). Nevertheless, the current situation is attributed to various long-term fiscal measures undertaken by the member states several years ago. For instance, the fiscal policies undertaken in the year 2009 had a major role to play in the aggravation of the current precarious situation. Following years of continued poor performance in various member states such as Greece, Spain and Italy, the European Union had to come in and pull their members from the quagmire. For instance, the first bailout for Greece was executed in 2010. Even with the initial bailout on Greece, the crisis progressed. As a result, the EU had to execute other bailouts on member states in similar crises (United Nations ESCAP, 2010).
Although many observers suggest that the EU debt crisis started in the year 2009 with the reporting of sudden increase of Greek’s budget deficit, the actual genesis of the crisis can be traced to the structures governing the European Union. The ratification of the Maastricht Treaty in 1992 led to the formation of the European Union. Based on the provisions of the treaty, stringent economic requirements were imposed on the member states to bring about a ‘convergence criteria’ through which member states would fulfill to be eligible. The member states were therefore expected to fulfill the underlying convergence criteria to be fit into the European Union. For instance, the European Union imposed price developments, fiscal developments, and exchange-rate developments of specified limits to the members. The convergence criteria for the member states therefore focused on various economic variables such as GDP, Budget status, Public debt, unemployment as well as inflation levels. Although concerted efforts have been exerted by the member states to salvage the debt crisis, the Euro debt crisis seems practically impossible to resolve. Nevertheless, Greece, Spain and Italy have had a major role to play in the perpetuation of the Euro debt crisis.
Greece as the genesis to the EU debt crisis
According to historical perspectives, financial crises often mean that governments cannot be able to meet their debt obligations. Consequently, such governments undergo sharp economic downturns, massive budget deficits, low revenue collection by the government, and huge debt levels. The decade before the global financial crisis of the year 2008 was characterized with extensive borrowing by the Greece government (Nelson et al., 2010). The huge government borrowing was meant to finance government current account and budget deficits. For instance, between the year 2001 and 2008, Greece had decided to adopt the Euro as the only currency of trade. Throughout this period, Greece had budget deficits averaging 5% per annum in comparison to the Eurozone deficits which averaged 2%. At the same time, Greece was recording a current account deficit of about 9% from the year 2001 to 2008 compared to the Euro zone’s average of 1% per year. Greece’s situation continuously got from bad to worse. Indeed, in the year 2009, Greece’s budget deficit is estimated to have been over 13% of the country’s GDP. The huge current account and budget deficits were attributed to the spendthrift nature of Greece’s previous governments.
Greece’s situation was worsened by the fact that the successive governments continued to finance the current account and budget deficits with additional borrowing through the international capital markets. Consequently, the country’s external debt was so massive and chronic and stood at 115% of the GDP by the year 2009. There was no question of Greece’s inability to remain within the ‘convergence criteria’; the country’s external budget level and budget deficits were pretty higher than the required limits for the EU member states. According to the EU rules on growth and stability in terms of budget deficit, the ceiling was set at 3% of the GDP. The external borrowing was set at 60% of the GDP. Greece continuously exceeded the limits set in the ‘convergence criteria’ meaning that the requirements of the EU were not seen taken seriously. Greece notoriously ignored the ‘convergence criteria’ requirements although some other member states also ignored the regulations once in a while.
The reliance of Greece on external borrowing in order to finance the budget and current account deficit made the country’s economy highly vulnerable to erosion of investor confidence. With the advent of the global crisis of 2008, Greece continued to obtain some reasonable financing from the international financial market successfully. The global financial crisis of 2008 was difficult for virtually all countries in the Eastern and Central Europe. However, Greece’s case was worse as it had started several years earlier. The current debt crisis in the EU started in the late 2009 when investors completed lost confidence in the Greece economy. Greece’s economy has been on a downward trend. Indeed, the many decisions made by the previous regimes have seen the economy become increasingly risky thus Greece getting lower ratings.
Although Greece became a member of the EU in 2001, it later emerged that the county had used dubious and unscrupulous data to portray that it had met the requirements of the ‘convergence criteria’. In fact, on November 2004, it was revealed that Greece cheated its way into the Eurozone. It emerged that in the year 2003, Greece budget had a deficit of 4.6% of the GDP and not the one reported of 1.7%. There was also a revision of the previous deficits on Greece’s budget over the previous years since 2000 to 2002. The actual figures were revised upwards by more than 2%. The total debt of the Greece government grew by more than 7% following the revision done in 2004. The revision of the figures upwards left many observes and stakeholders wondering about the reliability of Greece statistics and particularly in relation to public finance. In view of the many occurrences associated with Greece’s deficits and increasing levels of international borrowing, there is no doubt that it sparked the biting debt crisis in the EU. The EU debt crisis that started in 2009 to 2012 was sparked by Greece’s debt issues and the effort by member countries to rescue it. The excel chart below portrays the full data of the Eurozone GDP.
Spain’s Role in the EU debt Crisis
Although Greece is viewed as the main reason for the explosion of the current debt crisis in the EU, other countries have also intensified the situation. One such country is Spain. Indeed, the Spanish economy has retrogressed from the once fastest growing economy in the Eurozone to an economy characterized with high unemployment rates and recession. Spain’s scenario is thought to have greatly contributed to the current debt crisis facing the Eurozone. Indeed, Spain was the fastest growing economy in the Eurozone as of the year 2007. The Spanish economy was growing at a rate of 3.5% as of the year 2007 with a budget surplus of 1.8% of GDP. At the same time, Spain has recorded an impressive growth in output since 1993. The period was characterized with extensive privatizations as well as increased property boom due to the existence of low interest rates within the Eurozone. However, the rapid growth recorded in the Euro region later became the source of the downfall for many member states.
In particular, the year 2007 saw Spain record impressive economic growth rates coupled with numerous positive trends throughout the country (Roberts, 2012). For instance, trains in Spain were plying all over the country an average speed of 300 km/hr due to the development of the world’s longest high speed network in Spain. Furthermore, Spain had adopted renewable energy sources as the main power to drive the high-speed train network. Therefore, solar and wind power were harnessed as the main sources of power. By so doing, Spain became a force to reckon with in relation to the use of renewable energy. However, Spain’s positive trend started to change in the year 2008. The global financial crisis led to extensive meltdown of Spain’s GDP especially during the third-quarter following the collapse of the Lehman Brothers. The outcome was a decline in the previous property boom recorded in the property market. Spain’s economy managed growth of 0.9% throughout the year 2008. Additionally, the banking sector in Spain was not unsettled by the financial crisis.
Spain’s woes were visible in the budget deficit of 3.8% recorded in the year 2008. As a strong economy that had recorded a surplus budget during the previous financial year, there was great fear and anxiety among economic observers and other stakeholders. The budget deficit recorded in 2008 was said to have been caused by declines in tax receipts. Furthermore, the building and services industries were no longer employing workers making Spain to enter into full blown recession in 2009. Consequently, there was an intensification of the budget deficit in the year 2009 of over 11.1%. On the basis of the continued pressure and high rate of economic decline, the socialist Premier Rodriguez decided to impose cuts on the expenditure amounting to 15 billion Euros in an attempt to strike a balance on the books and also bring a control on the costs of financing. Furthermore, the costs of financing had been rising alarmingly due to Greece contagion (Wells, 2012).
Extensive efforts led to a slowed economic meltdown to only 0.1% by 2010. The decline in the economic growth in 2009 had been 3.7%. At the same time, the government was able to reduce the budget deficit to 9.3%. However, Spain recorded the highest level of unemployment in Europe. Additionally, the revenues collected by the government had been declining and the economy struggling. The debt crisis in the EU was further sparked by the growing borrowing costs recorded by Spain. Indeed, the past few years have seen Spain’s borrowing costs rise to levels regarded unsustainable. This is particularly due to the flooding of cheap credit in the Eurozone by the European Central Bank. Eventually, Spanish banks admitted to being in urgent need of 100 billion Euros assistance from the European Central Bank. The outcome has been the recent exit of Portugal from financial markets owing to the intensified cuts in financing costs.
Italy’s Role in the EU debt Crisis
Nelson, RM, Belkin, P & Mix, DE 2010. Greece’s Debt Crisis: Overview, Policy Responses, and Implications. Congressional Research Service.
Roberts, M 2012. Debt Crisis: Where Did It All Go Wrong in Spain? Retrieved on Tuesday, August 27, 2013 from http://www.telegraph.co.uk/finance/financialcrisis/9423143/Debt-crisis-where-did-it-all-go-wrong-in-Spain.html.
Shapiro, A 2009. Multinational Financial Management. John Wiley & Sons.
United Nations ESCAP 2010. Macroeconomic Policy and Development Division Policy Briefs. The European debt Crisis: Implications for Asia and the Pacific. United Nations ESCAP.
Wells, J 2012. Europe’s Debt Crisis: Spain Becomes the Great Eurozone Test Case. Retrieved on Tuesday, August 27, 2013 from http://www.thestar.com/news/world/2012/06/29/europes_debt_crisis_spain_becomes_the_great_eurozone_test_case.html.