Question

Please read 'Crisis in the Euro Zone' (The Greek Sovereign Debt Crisis) on page 264 in the 8th edition and discuss the following questions:

This article explores the causes of the 2010 financial crisis in Greece and its implications for other countries in the Euro Zone. Years of overspending by the Greek government led to huge deficits that the country could not manage. While the country’s problems had been hidden throughout much of the decade, a new government that took power in 2009 revealed that Greece’s problems were actually worse than had been suspected. Investors lost faith in the Greece and its ability to not only refinance its debt, but also implement policies to reduce its debt load. This combined with concerns that other countries in the Euro Zone could have problems sent the euro to its lowest level in years.  

1. Discuss the implications of the financial crisis in Greece on other countries in the Euro Zone. What does the loss of confidence in Greece and indeed in Spain, Portugal, and Italy as well mean for the bloc?

2. What does a falling euro mean for U.S. companies exporting to the European Union and for U.S. companies with operations in the bloc?

Answer 1

The crisis of eurozone emerged in 2009 during the period of great recession due to high governmental structural defecits and a rise in debt level

Financial crisis in Greece

• Greece economy was considered one of the fastest economy in the eurozone in the mid 2000s.
• during the great recession Greece was badly hit due specific hit on the industries of shipping and tourism. which were sensitive to changes in business cycle.
• in order to keep the economy functioning at the pase that it was the government kept spending heavily which led to deeper debts
• to cover up the debt Greece borrowed from IMF and EU.
• a series of austerity measure were taken by the government to secure the loan also known as the first economic adjustment programme, which provoked anger amongst the greeks, massive roits, protests, social unrest.
• then the European commission, European Central banl, IMF together offered Greece a second bailout financial help
• although the implemented austerity measures did bring down the primary decifit of Greece but also worsened the conditon of greece economy. later the deficit grew deeper and deeper.
• 2011 Greece experienced it worst GDP at 6.9%
• it lost almost 40% of its purchasing power, excessive spending cuts, empoyment rate fell and youth were left unemployed to a great extent
• it is beleived that harsh austerity measures were a cause to the deep contraction of the economy
• economists argued that the best option of greece was to opt for an enigneer an "orderly default" and withdrawal of athens from the eurozone and reintroduce it currency at a debate rate.
• the withdrawal of greece from the eurozone would bring in devastation specific to the political conditions
• the exit of Nomura would devastate the condition of Drachma by 60%, hence lead to devaluation, inflation would soar to 40-50%
• exit of greece would bring in devastating repercursions like civil war, hyperinflation, bank run,and the central banks to loose the debt the greece economy that borrowed
• hence the greek government made the largest default in history by declaring a default on itz debt

Falling euro effect on th US

• US is tightly linked to EU via trade, investments, and the financial markets.
• hencea fluctutaion in any of the factors above would definitely bring out a change in the linked country
• thus the euro crisis affected the US economy, thus threatenning theUS fiancail and monetary poliices
• the trade an dinvestment links between the teo counttries ave a drastic effects on the economy.