The European debt crisis is an ongoing financial crisis that has made it difficult or impossible for some countries in the euro area to pay back or refinance their government debt without the help of a third party.
The European debt crisis stems from the euro zone's structural problems and a combination of complex factors, including financial globalization; easy credit conditions during the period 2002-2008 that encouraged high lending and lending practices; the global financial crisis 2007-2012; imbalance of international trade; an exploding real estate bubble; global recession 2008-2012; fiscal policy options related to government revenues and expenditures; and the approach used by the state to save troubled banking industry and private bond holders, assuming private debt burden or socialization losses.
One narrative explaining the causes of the crisis began with the significant increase in savings available for investment over the 2000-2007 period when the global collection of income securities continued to increase from about $ 36 trillion in 2000 to $ 70 trillion in 2007. This "Giant Pool" Money "rises as savings from high-growth developing countries enter global capital markets Investors seeking higher yields than those offered by US Treasury bonds seek alternatives globally.
The temptations offered by such available savings flood regulatory and regulatory controls and policies in countries by country, such as lenders and borrowers who use these savings to use, produce bubbles after bubble around the world. While these bubbles have exploded, causing asset prices (eg, residential and commercial property) to decline, liabilities owed to global investors remain at full price, raising questions about the solvency of governments and their banking systems.
How every European country involved in this crisis borrows and invests the money varies. For example, Irish banks lend money to property developers, resulting in a massive property bubble. When the bubble bursts, the Irish government and taxpayers assume personal debt. In Greece, the government increased its commitment to public workers in the form of massive wage and pension benefits, with the former doubling in real terms for 10 years. Iceland's banking system grew enormously, creating debt to global investors (external debt) several times the GDP.
The interconnection in the global financial system means that if one country fails to pay its debt or enters a recession causing some external private debt to be jeopardized, the creditor banking system faces a loss. For example, in October 2011, Italian borrowers owe French banks $ 366 billion (net). If Italy can not finance itself, the French banking and economic system can be under significant pressure, which in turn will affect French creditors and so on. This is called financial contagion. Another factor contributing to interconnection is the concept of debt protection. The agency signed a contract called credit default swaps (CDS) that resulted in payments should fail on certain debt instruments (including government issued bonds). However, since some CDS can be purchased on the same security, it is unclear what is exposed to each country's current banking system to CDS.
Greece, Italy and other countries try to artificially reduce their budget deficits that deceive EU officials with the help of derivatives designed by major banks. Although some financial institutions clearly benefit in the short term, there is a very long crisis.
Video Causes of the European debt crisis
Increased household and government debt levels
In 1992, EU members signed the Maastricht Treaty, where they pledged to limit their deficit spending and debt levels. However, a number of EU member states, including Greece and Italy, are able to circumvent this rule, fail to comply with their own internal guidelines, set aside best practice and ignore internationally agreed standards. This allows sovereignty to cover their deficits and debt levels through a combination of techniques, including inconsistent accounting, off-balance-sheet transactions and the use of complex currencies and credit derivative structures. The complex structure is designed by a leading US investment bank, which receives huge fees in return for their services.
The adoption of the euro caused many different credit-eligible Eurozone countries to receive the same and very low interest rates for their bonds and personal credit for years before the crisis, which by writer Michael Lewis referred to as "an implied assurance of Germany." As a result, creditors in countries with initially weak currencies (and higher interest rates) suddenly enjoy much more favorable credit terms, which encourage public and private spending and lead to economic booms. In some countries like Ireland and Spain, low interest rates also cause housing bubbles, which explode at the height of the financial crisis. Commentators such as Bernard Connolly highlight this as a fundamental issue of the euro.
Some economists have dismissed the popular notion that the debt crisis is caused by excessive social welfare spending. According to their analysis, the increase in debt levels was largely due to the large bailout package provided to the financial sector during the financial crisis of the late 2000s, and the subsequent global economic slowdown. The average fiscal deficit in the euro area in 2007 was only 0.6% before it grew to 7% during the financial crisis. In the same period, the average government debt rose from 66% to 84% of GDP. The authors also stress that fiscal deficits in the euro area are stable or even shrink since the early 1990s. US economist Paul Krugman calls Greece the only country where fiscal irresponsibility is at the heart of the crisis. The British economic historian Robert Skidelsky adds that it is indeed an excessive lending by banks, not the deficit spending that created this crisis. The increasing debt of the government is a response to the economic downturn as spending increases and tax revenues fall, not the cause.
Either way, high levels of debt alone can not explain the crisis. According to The Economist Intelligence Unit, the position of the euro area looks "no worse and in some ways, better than in the US or the UK." The budget deficit for the euro area as a whole (see chart) is much lower and the euro area government's debt/GDP ratio of 86% in 2010 is about the same level as in the US. Moreover, private sector debt across the euro area is clearly lower than in the highly leveraged Anglo-Saxon countries.
Maps Causes of the European debt crisis
The trade imbalance
Martin Wolf's commentator and journalist Financial Times has confirmed that the root of the crisis is the imbalance of trade growth. He noted ahead of the crisis, from 1999 to 2007, Germany had far better public debt and fiscal deficits relative to GDP than most affected eurozone members. In the same period, these countries (Portugal, Ireland, Italy, and Spain) had a far worse balance of payments position. While the German trade surplus increased as a percentage of GDP after 1999, the deficits of Italy, France and Spain all deteriorated.
Paul Krugman wrote in 2009 that a trade deficit by definition requires appropriate capital flows to finance it, which can lower interest rates and stimulate the creation of bubbles: "In the interim, capital inflows create the illusion of wealth in countries, just as for American homeowners: asset prices are rising, strong currencies, and everything looks fine.But the bubbles always sooner or later explode, and the miracle economy of yesterday has become the case of today's basket, the countries whose assets have evaporated but whose debts remain too real. "
Trade deficits can also be affected by changes in relative labor costs, which make the southern states less competitive and increase trade imbalances. Since 2001, Italy's unit labor cost has risen 32% compared to Germany. The labor cost of the Greek unit rose much faster than Germany over the last decade. However, most EU countries have increased labor costs more than Germany. Countries that allow "wages to grow faster than productivity" lose competitiveness. The controlled cost of German labor, while a debatable factor in trade imbalances, is an important factor for the low unemployment rate. Recently, the trading position of Greece has improved; in the period 2011 to 2012, imports fell 20.9% while exports grew 16.9%, reducing the trade deficit by 42.8%.
Simon Johnson explains hope for convergence in the eurozone and what is wrong. The euro locks countries into exchange rates by "huge bets that their economies will gather in productivity." Otherwise, workers will move to countries with greater productivity. Instead the opposite occurs: the gap between German and Greek productivity increases, resulting in a large current account surplus financed by capital flows. Capital flows can be invested to increase productivity in peripheral countries. Capital flows are wasted in consumptive consumption and investment.
Furthermore, eurozone countries with sustainable trade surplus (ie, Germany) do not see the currency they appreciate relative to other eurozone countries because of the same currency, keeping their exports artificially cheap. Germany's trade surplus in the euro zone declined in 2011 as its trading partners were less able to find the financing needed to fund their trade deficit, but the German trade surplus outside the euro zone has soared as the value of the euro declined relative to the dollar and other currencies.
Economic evidence suggests the crisis may be more related to the trade deficit (which requires private loans to fund) than the level of public debt. Economist Paul Krugman wrote in March 2013: "... a really strong relationship in [eurozone countries] is between the interest gap and current account deficit, which is in line with the conclusion many of us have achieved, that the euro area crisis is a truly balance of crisis payments, not a debt crisis. "A February 2013 paper of four economists concluded that," Countries with debts above 80% of GDP and persistent persistent trade balance deficits are susceptible to rapid fiscal decline... "
Eurozone system structural issues
One theory is that this problem is caused by structural contradictions in the euro system, the theory being that there is a monetary union (the common currency) without fiscal union (eg, the function of general taxation, pensions, and treasury). In the Eurozone system, countries are required to follow a similar fiscal path, but they have no public treasury to enforce it. That is, countries with the same monetary system have freedom in fiscal policy in taxation and expenditure. Thus, despite some agreements on monetary policy and through the European Central Bank, countries may not be able or will simply choose not to follow suit. This feature brings fiscal freedom to the fringe economy, especially represented by Greece, as it is difficult to control and regulate national financial institutions. Furthermore, there is also the problem that the Eurozone system has a difficult structure for quick response. The euro zone, which has 18 countries as its members, requires unanimous approval for the decision-making process. This will lead to failure in prevention of transmission from other areas, as it will be difficult for the Euro Zone to respond quickly to this issue.
In addition, as of June 2012 there is no "banking union" which means that there is no European-wide approach to bank deposit insurance, bank supervision, or means of recapitalization or wind-down of failed banks. Bank deposit insurance helps avoid bank runs. Recapitalization refers to the injection of money into the bank so that they can fulfill their direct obligations and resume lending, as it did in 2008 in the US through the Asset Problem Assistance Program.
Columnist Thomas L. Friedman writes in June 2012: "In Europe, hyperconnectedness is well exposed to how uncompetitive some of their countries are, but also how they become interdependent.This is a deadly combination.When countries with different cultures become intertwined and interdependent - when they share the same currency but not the same work ethic, retirement age or budgetary discipline - you end up with German savers boiling at Greek workers, and vice versa. "
Monetary policy disfigurement
Membership in the Euro Zone establishes a single monetary policy, which prevents individual member countries from acting independently. In particular they can not make Euro to pay the creditors and eliminate the risk of their failure. Because they share the same currency with their trading partners (eurozone), they can not lower their currency to make their exports cheaper, which in principle will lead to increased trade balance, higher GDP and higher nominal tax revenues.
In the reverse direction, assets held in a devalued currency suffer losses on the party holding it. For example, by the end of 2011, following a 25% reduction in exchange rates and a 5% rise in inflation, eurozone investors in Pound Sterling, locked into the euro exchange rate, have already slashed about 30% in the value of these debt repayments.
Loss of trust
Prior to the development of the crisis, it was assumed by regulators and banks that the country's debt from the euro zone is safe. Banks have substantial holdings of bonds from weak economies such as Greece which offer a small premium and seem equally healthy. As the crisis develops it becomes clear that Greek bonds, and perhaps other countries, offer much greater risk. Contributing to a lack of information about the risks of European sovereign debt is a conflict of interest by banks that get large amounts of bonds. The loss of confidence is marked by the rise in CDS prices of sovereignty, indicating market expectations about the country's credit worthiness (see graph).
In addition, investors have doubts about the likelihood of policy makers to immediately overcome the crisis. Because countries that use the euro as their currency have fewer monetary policy options (eg, they can not print money in their own currency to pay debt holders), certain solutions require multinational cooperation. Furthermore, the European Central Bank has a mandate for inflation control but not a mandate of work, as opposed to the US Federal Reserve, which has a dual mandate.
According to The Economist, the crisis is "as politically and economically" and the result of the fact that the euro area is not supported by the institutional equipments (and mutual reciprocity of solidarity) of a country. Big bank withdrawals have taken place in weaker eurozone countries such as Greece and Spain. Bank deposits in the eurozone are insured, but by agencies of each member government. If the bank fails, it is unlikely the government will be able to fully and immediately honor their commitments, at least not in the euro, and there is a chance that they may leave the euro and return to the national currency; thus, euro deposits are safer in Dutch, German, or Austrian banks than in Greece or Spain.
As of June 2012, many European banking systems are under significant pressure, especially Spain. A series of "capital calls" or notices that banks require capital contribute to freezing in the interbank funding and lending market, as investors worry that banks may hide losses or lose confidence in each other.
As of June 2012, as the euro reaches new lows, there are reports that the rich move assets from the euro zone and in the euro zone from South to North. Between June 2011 and June 2012 Spain and Italy alone have lost 286 billion dollars and 235 billion euros. Overall the Mediterranean countries have lost assets worth ten per cent of GDP since capital flight began in late 2010. Mario Draghi, president of the European Central Bank, has called for an integrated European deposit guarantee system that will require European political institutions to create solutions that effective for problems beyond the European Central Bank's strength limits. As of June 6, 2012, closer European banking integration seems to be being considered by political leaders.
Interest on long-term debt
In June 2012, after negotiations on the Spanish bailout line interest rates on Spanish and Italian long-term debt continued to rise rapidly, raising doubts on the efficacy of the bailout package as something more than a transient measure. The Spanish rate, more than 6% before the credit limit is approved, approaches 7%, a rough indicator for serious problems.
Ranking agency views
On December 5, 2011, S & amp; P placed its long-term sovereign rating on the 15-member eurozone on "CreditWatch" with negative implications; S & P; P writes this because "systemic stress of five interrelated factors: 1) Strengthening credit conditions across the eurozone 2) higher high risk premiums on more and more eurozone rulers including some currently rated 'AAA'; 3) The ongoing contradiction among European policymakers on how to overcome the direct and long-term market confidence crisis, how to ensure greater economic, financial and fiscal convergence among euro zone members 4) High levels of government and household debt across the vast area of ​​the eurozone, and 5) increased risk of economic recession in the euro zone as a whole by 2012. Currently, we expect output to decline next year in countries such as Spain, Portugal and Greece, but now we set the possibility 40% of the decline in output for the euro zone as a whole. "
See also
- commodity boom of the 2000s
- The global financial crisis 2007-2012
- 2008-2012 Iceland's financial crisis
- 2008-2012 global recession
- The crisis and protest situation in Europe since 2000
- European government debt crisis: List of acronyms
- European government debt crisis: List of protagonists
- Federal Reserve Economic Data
- The final recession of 2000 in Europe
- List of countries by credit rating
References
External links
- The Impact of Euro Zone Crisis on European Integration Process Documentation by Institut d'Etudes EuropÃÆ' © ennes from Università © à © Libre de Bruxelles
- Euro Zone Crisis Impact on European socio-economic governance Documentary by Institut d'Etudes Europà © ennes from Università © à © Libre de Bruxelles
- The European Union Pocket Guide by Transnational Institute in English (2012) - Italian (2012) - Spanish (2011)
- Dahrendorf Symposium 2011 - Changing Debates in Europe - Moving Beyond Conventional Wisdom
- Dahrendorf Symposium Blog 2011
- Eurostat - Statistics Explained: The structure of government debt (data October 2011)
- Interactive Debt Crisis Map Economist Magazine , 9 February 2011
- The European Debt Crisis New York Times page topics are updated daily.
- Track the pages of the European Debt crisis New York Times , with the latest headings by country (France, Germany, Greece, Italy, Portugal, Spain).
- Map of European Debt New York Times December 20, 2010
- Budget deficit from 2007 to 2015 Economist Intelligence Unit March 30, 2011
- Protest in Greece as Response to Heavy Measurement Measures in the European Union, IMF Bailout Fund - a video report by Democracy Now!
- The Diagram of the Debt Position of European Countries New York Times 1 May 2010
- Argentina: Life After Default Sand and Color 2 August 2010
- Google - public data: Government Debt in Europe
- Stefan Collignon: Democratic Requirements for European Economic Governments Friedrich-Ebert-Stiftung, December 2010 (PDF 625 KB)
- Nick Malkoutzis: Greece - A Year in the Friedrich-Ebert-Stiftung Crisis, June 2011
- Rainer Lenz: Crisis in Eurozone Friedrich-Ebert-Stiftung, June 2011
- Wolf, Martin, "Creditors can be upset but they need a debtor", Financial Times , November 1, 2011 7:27 pm.
- More Pain, No Gain for Greece: Does Euro Fulfill the Cost of Pro-Cyclic Fiscal Policy and Internal Devaluation? Center for Economic and Policy Research, February 2012
- "Liquidity is just buying time" - Where are European experts for a long-term and holistic approach? Interview with Liu Olin: Euro Crisis. A Chinese Economist's View. (03/2012)
- Michael Lewis-How the Financial Crisis Created a Third New World-October 2011 NPR, Oct 2011
- This American life - NPR Continental Breakup, January 2012
- Global Financial Stability Report of International Monetary Fund, April 2012
- OECD Economic Prospects-May 2012
- "Letting the Euro: A Practical Guide" by Roger Bootle, winner of the 2012 Wolfson Economic Prize
- "Solving the Impasse: The Way Out of Crisis"
- Euro Zone Crisis - Can Growth Foster Difficulty? EMEA World Bank Chief Economist, Indermit Gil, on potential consequences, CFO Insight Magazine, July 2012
Source of the article : Wikipedia
0 Comments