describe the main issues of the European debt crisis

Expert Solution

Solution:-

The European debt crisis had begun in the European Union in 2009. It is also referred to as Eurozone crisis. This is a multiyear debt crisis. Some Eurozone member states (Spain, Cyprus, Portugal, and Greece Ireland) were not able to repay their government debt. They were not able to bail out the banks which owed a huge amount of money without taking the help of other Eurozone countries, European Central Bank or the IMF.

The European debt crisis emerged during the Great Recession around late 2009. At that time the government deficits were very high and debt levels were accelerating. Due to the Great Recession, the banking sector had suffered huge losses. Most of the European states had to bail out their banks that were highly affected. The recapitalization of many public funded banks was one of the major reasons for the declining debt to GDP ratio experienced by several European governments during the Great Recession. The main reasons for the four sovereign debt crises emerging in Europe were a result of competitive weakness; considerable liability stocks (government, private, and non-private sector), large pre-existing debt to GDP ratio, weak actual and potential growth and liquidation of banks and sovereigns.

There was a huge rise in the interest rate spreads for the government bonds in the adversely affected states. Four Eurozone states were rescued by sovereign bailout programs. These bailout programs were provided by IMF and European Commission and the technical support was provided by the European Central Bank.

Certain governments had raised taxes and reduced expenditures to fight the crisis. This created social unrest and a debate among the economists.

In mid-2012 financial stability improved significantly in Eurozone and the interest rates also started falling. This happened because of the successful fiscal consolidation and implementation of structural reforms in the countries which had the greatest risk.Also, there were various policy measures that were taken by ECB and EU leaders.

Rahul Sunny answered 2 years ago

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