Effects of Euro Zone Crisis

Effects of Euro Zone Crisis

Euro zone crisis refers to the inability of the euro zone countries to pay debts that have accumulated over the recent decades. It is also called Europe’s debt crisis. Due to the slowing economy globally, sustainable financial policies of some countries in the euro zone were exposed. The euro zone or the euro area comprises of 17 countries but the effects of this crisis have been felt worldwide. The effects of Euro zone crisis are being felt by almost every country due to the increasing global interdependence among countries.

Experts feared that if Spain, Greece and other countries in the euro zone defaulted on their debts, the crisis would have been worse than that of 2008. These countries have borrowed and spent a lot of money since the beginning of the global recession. This has made these countries lose their financial control. The crisis began in October 2009 after the admission by the new Government in Greece that it would have a double budget deficit. Greece became the first country to get a bailout from the other countries in Europe, amounting to multi-billion pounds.

What are the effects of Euro zone crisis?

  • Trade loss

Loss of trade is one of the major effects of this crisis. This is because reduction in the incomes of the lower European countries reduced the demand for goods from other countries like the U.S.  For the United States, euro zone is a third largest destination for its exports. It accounts for 15% of the total goods exported from the U.S and one-third of the exported services.

  • Revelation of specific problems

The crisis has revealed several problems of the euro zone that relate to the sustainability of public finance as well as sovereign debt resolution, competitiveness and imbalances. This crisis has also revealed the inability or difficulties in supporting the economic growth of the countries that are under the pressures of the market, accumulation of debts in the private sector and divergences of asset price. It has also revealed the differences between the integration of the banking sector and the EU framework’s weaknesses when it comes to the supervision, regulation as well as crisis resolution and challenges in making effective and prompt policy decisions in the euro area. These are some of the problems that led to the euro zone crisis.

  • Institutional changes

The euro crisis triggered several institutional changes. These include several new agreements on coordination, policy surveillance, rule-enforcement as well as financial assistance. Decisive measures for supporting the banking sector were also introduced by the European Central Bank. These measures are also aimed at easing the tensions in the markets of government bond. These are important because market participants and the bank responded to the euro zone crisis.

  • Financial linkages

The euro area is important to various parts of the world including Asia and other countries that engage in business activities with the countries of the euro area. As such, the euro crisis affected the existing financial linkages between the euro zone countries and other countries in the world.

How the effects of Euro zone crisis were handled

Angela Merkel, the German Chancellor, came up with a six-point plan in May 2012 to rebut the proposal by Francois Hollande, the newly elected president of France to create Eurobond while cutting back austerity measures and creating more stimulus for the economy. This plan was followed by the intergovernmental treaty that was approved on 8th December 2011. Leaders of the EU agreed to come up with fiscal unity that would be parallel to the existing monetary union. The treaty enforces the Maastricht Treaty budget’s restrictions, allow EU to serve as an integrated unit and reassure EU lenders that the Union would support the sovereign debt of the members.

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