To what world sees as an alarming danger to the global
economy. What is it that has dragged the European countries into a meltdown and
stagnated the growth of the developing economies? Is it mere hype created by
media institutions or is a juncture of reality? In this article you will
explore what is the Euro-Zone crisis or sovereign debt crisis. Before you go
into deep insights of this crisis, you must know two major giant groups of
Europe viz. European Union and Euro Zone.
European Union
Established in 1993, currently has 27 member countries of
Europe. It was formed to ensure the free movement of goods, capital, services
and people in member countries.
Euro Zone
Established in 1999, currently has 17 members countries of
Europe. Euro was adopted the common currency for trade, that would help foster
the economies of the countries. European central bank is the central authority
for administrating the monetary policy of the member states. For countries to
remain in Euro Zone, their budget deficit should not exceed 3% of their GDP.
It is an irony on the part of Europe, having two big-giant
groups viz. European union and Euro zone working to foster and strengthen the
economies of European countries, and then witnessing such a serious crisis at home.
Why it is called Sovereign Debt Crisis??
Whenever government is in need of some money to finance its
spending, it issues bonds in local currency or international currency. What is
the difference between government bonds and sovereign bonds? If the bonds are
in local currency, it is called government bonds. If the bonds are in
international currency, it is called sovereign bonds. Sovereign bonds can be
sold to other countries and foreign investors. It has to pay the interest money
on specific period and principal amount at maturity. It has spread to Greece,
Ireland, Portugal, Italy and Spain. Italy has the highest debt, while Portugal
and Ireland are high on list as well. This crisis has its effects to whole of
the Europe and world as well.
Greece - Most Affected
Greece is a developed economy with high Human Development
Indicators. Tourism and shipping are the major industries of Greece.
Major
reasons -
1. Tourism
and shipping industries were highly affected due to the sub-prime crisis in US.
2.
Over-expenditure on luxurious things.
3.
High-level corruption in government.
Greece borrowed money by issuing bonds from European Central
Bank, maturity period has arrived and Greece needs to repay the amount.
Greece government paid Goldman Sachs and other financial
institutions to falsify their reports about country's high debt. Greece has the
highest budget deficit of 13.6% of GDP or $ 532.9 Billion as of 2010.
After effects
S&P downgraded the Greece rating from BBB+ to BB+ in
2010.
Bailout and Austerity
The first bailout was approved by European Union and
International Monetary Fund. They agreed to pay Euro 110 Billions, with EU
paying Euro 80 Billion and IMF paying Euro 30 Billion. To continue receiving
bailout, Greece has to follow some austerity measures and bring down its Budget
deficit at 3% of GDP by the end of 2014, so it continues to remain the part of
Euro-zone.
Austerity
measures to be followed by Greece -
1. Wage
cuts.
2. Freezing
the pensions for 3 years.
3. Increase
in sales tax to 10%.
4. Slashing
of bonus.
It is a diktat on the people of Greece due to over-burdening
of austerity measures.
Euro-Zone Crisis - A by-product of Sub-prime crisis
The economists suggest that the recent crisis in Europe was
a ripple-effect of the crisis that hit the private financial institutions in
US. To counter the global recession, European countries increased public
spending, which began in 2008? Crisis in Europe hit majority of private
financial institutions (e.g.- Lehman Brothers, American Insurance group) i.e.
private banking institutions going bankrupt. While sovereign debt crisis in
Europe led to the crashing of government financial institutions, i.e. countries
itself going bankrupt.
The world economic
scenario is precarious. What we can do is wait and watch the show as it enters
in to the next level. A lot of lessons are to learnt by the world economies
including India as the show is proceeding in Europe.
Important Terms:
Budget Deficit - The amount by which some measures of the
government revenues fell short of some measure of government spending.
Sub-prime Crisis - It was basically related to reckless
lending to NINJA borrowers and mis-selling of toxic assets by reputed financial
giants. It led to the crashing of private financial institutions in US.
Bailout - A loan given to a company or a country which faces
financial turbulence or bankruptcy.
International Monetary Fund - The international organization
that helps by providing loans to countries facing with balance of payments
problem.
