Question

What were the causes of the 2010-2012 sovereign debt crisis in the EU? What does this crisis tell us about the weakness of the euro? Do you think the euro will survive the sovereign debt crisis?

Answer 1

Answer-

Introduction
The European sovereign debt crisis is also referred to as the Eurozone crisis. This is a crisis that has been in existence since 2008. It affected countries such as Greece, Portugal, Ireland, Spain, and Cyprus. This crisis when these European countries faced many challenges such as an increase in public debts, the collapse of financial institutions, etc. During this crisis period, these Eurozone countries faced many challenges in meeting their financial obligations i.e. being unable to repay or refinance their government debt.
Causes of the 2010-2012 sovereign debt crisis in the EU
   Fiscal shortcomings
Countries within the Eurozone had unsustainable fiscal policies to control currency within their specific economies. This resulted to slow growth of the economy, for example, Greece spent many years and failed to undertake its fiscal reforms which has resulted to the slow growth of their economy.
Institutional weaknesses
Many countries within the Eurozone did not have sufficient tools to enforce national budgetary policies by their institutions. This resulted in a deficit in economic and fiscal integration that supports currency union within the Eurozone.
Lack of effective economic policy
EU policymakers did not ensure that all the monetary instruments were made available to address all the macroeconomic imbalances within the zone. The inflow of cheap credit from outside the European Union, made possible by the introduction of the Euro, and the convergence of interest rates, led to an asset bubble in vulnerable economies that the EU institutions could not prevent.

What does this crisis tell us about the weaknesses of the euro?
It shows that Euro is weakened by its depreciation against other currencies outside the Eurozone that is stable for example the US dollars. Depreciation of the Euro was as a result of currency instability in the Eurozone, slow growth rate of the Eurozone economy, poor monetary policies implemented, etc. that are exhibited as a result of the sovereign debt crisis
Do you think the euro will survive the sovereign debt crisis?
No. Since countries within the Eurozone had poor or slow economic growth, experienced instabilities in their pricing, had poor monetary systems, etc. it will be difficult for Euro to survive the debt crisis. This is because other currencies such as dollars are stable and it is, therefore, likely to weaken the Euro by enhancing surplus imports from the Eurozone countries and limiting exports by these countries. This results in better performance of other currencies than the euro thus weakening its value.