1.The sovereign crisis in the EU was caused by the lack of an effective institutions/tools to avoid the macro-economic build-up and, in some countries the deficiency of common Eurozone foundations and fiscal imbalances to effectively engross shockwaves (Wijffelaars and Loman, 2015). The large intra-Eurozone capital flows were led by the entry into the euro area because of lower borrowing costs, mainly the bank’s loans, resultant to significance increase largely private, and in few cases obligation in peripheral member states also in public sector. For productive investment, cheap foreign credit was not used frequently. While some of the countries were misusing the things in different ways like; a finance consumption, housing oversupply. Some of the countries were applying and following the fiscal policies that were showing responsiveness.
Most peripheral countries with their external investment positions faced a corrosion due to the large current account deficits. The great recession affected those peripheral countries which were having large bangs on housing market like; Spain and Ireland were affected. In 2010, when the Greek government did not have sufficient amount for markets to finance its debt called as sovereign debt crisis. Due to the lack of common Eurozone, Greece’s fiscal problems rising concerns were spread quickly to the other peripheral member states. They were unable to absorb growing uncertainty and shocks about the EU’s ‘non-bailout’ clause interpretation. Euro members’ readiness conditions for the support of a member who is weaker conditions and the currency union itself.
In peripheral countries, robust dependence on interlinkages between external capital and government and banks make these problems more deteriorated. The peripheral countries were confronted with a strong financial condition for banks, households, companies, and sovereigns, and a sudden stop of capital inflows. It looks that euro can survive by its fortune. By the day the state of the euro looks bleaker. If the Greek elections can make or break the nation’s ties with the Eurozone, this idea has become an increase in the possibility of a euro break up. Germany is the most powerful country in the Eurozone, which is having enough economic pull to keep the euro together. Germany should help to make euro out from the debt crisis. The euro is creative, and it can use its creativity to come out from the crisis. Work is in progress for the euro to get out from this phase which is a positive sign to overcome the situation (Tseng, 2012).
2.Early in 2000’s during Greece’s fast growth, the Greek government borrowed heavily. The government employed fraudulent accounting practices to cover the defilements of 3 percent deficit rule. When Portugal joined the Eurozone, it took benefit of low interest for the purpose of borrowing for the purpose to build up a great public debt. After the recession of 2008, the government of Spain reacted with massive Keynesian stimulus policies running, running great public deficits. Initially, the public debt of Spain was very low, but the deficits increased it with the passage of time. The conditions and problems faced by the Spain and Italian government were different from each other. Initially, Italy was having high-level debts, even though it had low public deficits (Conesa, 2012).
3.A falling euro can affect any country as the financial system of the world is connected strongly. If there is some kind of issue in Greece or any other country which is from Europe is a collective problem for all other related countries. As we all know that there is a linkage between the financial systems of the countries worldwide. European debt crisis is not only affecting the financial system of the countries but also the U.S. government budget is suffering from it. Forty percent of the Fund (IMF) capital is provided by the United States. It shows that U.S. taxpayers need to stop giving the money to IMF if there is an access amount of money needed by IMF to a bailout. This is causing the growth in debt of U.S. The events that have been happened in the Greece and other European countries are a probable threatening sign for the policymakers in U.S. U.S. policymakers have to focus for the change of policy for debts (Kenny, 2017).
The investment and trade links between the European Union and the United States are significant. Above fifty percent of U.S. overseas assets are in the hands of Europe, about twenty percent of exports by U.S. are consumed, on the other hand about forty percent of Europe’s foreign assets are held by the United States. There would be serious consequences due to the higher volatility and lower growth. In the global recovery, Europe has shown itself to be a straggler. The GDP in the first quarter was only 0.3 percent, while China and United States GDP’s were 11.9 and 2.5 respectively. It is a risk for U.S. companies to export the European Union due to the debt issue. This GDP rate fluctuations are showing that the situation may get worse than getting better. In the coming months, the euro will further be depreciated because of this crisis. The tourists that travel from Europe to the United States will be reducing their purchasing power by the depreciation.
At a time when policymakers are hoping to avoid a return to high current account deficits, the European goods will be cheaper in U.S. market. The mutual trade balance of U.S. and Europe will probably decline with exports likely to fall and imports likely to rise. Those U.S. companies will be affected in the Europe which is operating in the Europe due to the debt crisis while assets and profits of the company are expressed in dollars in the balance sheets. The companies sourcing in dollars and selling in Europe will be getting sharper profit declines. Though European countries have recovered from the previous situation of the debt crisis there is still a chance that economic shock can come back again and will remain for several years. Euro needs a lot of time to recover as there had been a great debt crisis. It will need years if there is no handsome amount of debt helped from the IMF, Germany, and other economically powerful countries.
Conesa, J. C. (2012, May 29). FEDERAL RESERVE BANK of MINNEAPOLIS. Retrieved from https://www.minneapolisfed.org/research/economic-policy-papers/chronic-sovereign-debt-crises-in-the-eurozone-20102012
Dadush, U. (2010, June 02). CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE. Retrieved from http://carnegieendowment.org/2010/06/02/euro-crisis-threat-to-u.s.-economy-pub-40887
Kenny, T. (2017, February 21). the balance. Retrieved from https://www.thebalance.com/what-is-the-european-debt-crisis-416918
Loman, M. W. (2015, December 18). RaboResearch-Economic Research. Retrieved from https://economics.rabobank.com/publications/2015/december/the-eurozone-debt-crisis–causes-and-crisis-response/
Tseng, N.-H. (2012, June 07). Fortune. Retrieved from http://fortune.com/2012/06/07/four-reasons-why-the-euro-will-survive/