Question

Please do a search (ex: The Economist, Financial Times) using the key word "Euro crisis". Write a 3-4 page summary of

a. what Euro crisis is,

b. what triggered it,

c. what has been done about it and by whom.

d. how Euro crisis impacted U.S. businesses.

Minimum 3 double-spaced pages. Base your essay on at least three articles. Provide references in the APA style.

Answer 1

(a)The European debt crisis is the shorthand term for Europe’s struggle to pay the debts it has built up in recent decades. Five of the region’s countries – Greece, Portugal, Ireland, Italy, and Spain – have, to varying degrees, failed to generate enough economic growth to make their ability to pay back bondholders the guarantee it was intended to be.

Although these five were seen as being the countries in immediate danger of a possible default at the peak of the crisis in 2010-2011, the crisis has far-reaching consequences that extend beyond their borders to the world as a whole.

In fact, the head of the Bank of England referred to it as “the most serious financial crisis at least since the 1930s, if not ever,” in October 2011.

The eurozone debt crisis was the world's greatest threat in 2011. That's according to the Organization for Economic Cooperation and Development. Things only got worse in 2012. The crisis started in 2009 when the world first realized Greece could default on its debt. In three years, it escalated into the potential for sovereign debt defaults from Portugal, Italy, Ireland and Spain. The European Union, led by Germany and France, struggled to support these members.

They initiated bailouts from the European Central Bank and the International Monetary Fund. These measures didn't keep many from questioning the viability of the euro itself.

(b) The causes of these crisis:

First, there were no penalties for countries that violated the debt-to-GDP ratios. These ratios were set by the EU's founding Maastricht Criteria. Why not? France and Germany also were spending above the limit. They'd be hypocritical to sanction others until they got their own houses in order. There were no teeth in any sanctions except expulsion from the eurozone. That harsh penalty which would weaken the power of the euro itself. The EU wanted to strengthen the euro's power. That put pressure on EU members not in the eurozone. They include the United Kingdom, Denmark and Sweden to adopt it. (Source: “Greece Joins Eurozone,” BBC News, January 1, 2001. “Greece to Join Euro,” June 1, 2000.)

Second, eurozone countries benefited from the euro's power. They enjoyed the low interest rates and increased investment capital. Most of this flow of capital was from Germany and France to the southern nations. This increased liquidity raised wages and prices. That made their exports less competitive. Countries using the euro couldn't do what most countries do to cool inflation. They couldn't raise interest rates or print less currency. During the recession, tax revenues fell. At the same time, public spending rose to pay for unemployment and other benefits. (Source: “Killing the Euro,” Paul Krugman, New York Times, December 1, 2011.)

Third, austerity measures slowed economic growth by being too restrictive. For example, the OECD said austerity measures would make Greece more competitive. It needed to improve its public finance management and reporting. It was healthy to increase cutbacks on public employee pensions and wages. It was a good economic practice to lower its trade barriers. As a result, exports rose. The OECD said Greece needed to crack down on tax dodgers. It recommended the sale of state-owned businesses to raise funds. (Source: “Economic Survey of Greece,” OECD, 2011.)

In return for austerity measures, Greece's debt was cut in half. But these measures also slowed the Greek economy. They increased unemployment, cut back consumer spending, and reduced capital needed for lending. Greek voters were fed up with the recession. They shut down the Greek government by giving an equal number of votes to the "no austerity" Syriza party. Another election was held June 17 that narrowly defeated Syriza. Rather than leave the eurozone though, the new government worked to continue with austerity.

The global economy has experienced slow growth since the U.S. financial crisis of 2008-2009, which has exposed the unsustainable fiscal policies of countries in Europe and around the globe. Greece, which spent heartily for years and failed to undertake fiscal reforms, was one of the first to feel the pinch of weaker growth. When growth slows, so do tax revenues – making high budget deficits unsustainable. The result was that the new Prime Minister George Papandreou, in late 2009, was forced to announce that previous governments had failed to reveal the size of the nation’s deficits. In truth, Greece’s debts were so large that they actually exceed the size of the nation’s entire economy, and the country could no longer hide the problem.

Investors responded by demanding higher yields on Greece’s bonds, which raised the cost of the country’s debt burden and necessitated a series of bailouts by the European Union and European Central Bank (ECB). The markets also began driving up bond yields in the other heavily indebted countries in the region, anticipating problems similar to what occurred in Greece.

(c) In May 2012, German Chancellor Angela Merkel developed a seven-point plan.

It went against newly-elected French President Francois Hollande's proposal to create Eurobonds. He also wanted to cut back on austerity measures and create more economic stimulus. Merkel's plan would:

1. Launch quick-start programs to help business startups.
2. Relax protections against wrongful dismissal.
3. Introduce "minijobs" with lower taxes.
4. Combine apprenticeships with vocational education targeted toward youth unemployment.
5. Create special funds and tax benefits to privatize state-owned businesses.
6. Establish special economic zones like those in China.
7. Invest in renewable energy.

Merkel found this worked to integrate East Germany. She saw how austerity measures could boost the competitiveness of the entire eurozone.

The seven-point plant followed an intergovernmental treaty approved December 8, 2011. The EU leaders agreed to create a fiscal unity parallel to the monetary union that already exists. The treaty did three things. First, it enforced the budget restrictions of the Maastricht Treaty. Second, it reassured lenders that the EU would stand behind its members' sovereign debt. Third, it allowed the EU to act as a more integrated unit. Specifically, the treaty would create five changes:

1. Eurozone member countries would legally give some budgetary power to centralized EU control.

1. Members that exceeded the 3 percent deficit-to-GDP ratio would face financial sanctions. Any plans to issue sovereign debt must be reported in advance.
2. The European Financial Stability Facility was replaced by a permanent bailout fund. The European Stability Mechanism became effective in July 2012. The permanent fund assured lenders that the EU would stand behind its members. That lowered the risk of default.
3. Voting rules in the ESM would allow emergency decisions to be passed with an 85 percent qualified majority. This allows the EU to act more quickly.
4. Eurozone countries would lend another 200 billion euros to the IMF from their central banks.

This followed a bailout in May 2010. EU leaders pledged 720 billion euros or $928 billion to prevent the debt crisis from triggering another Wall Street flash crash.

The bailout restored faith in the euro which slid to a 14-month low against the dollar.

The United States and China intervened after the ECB said it would not rescue Greece. LIBOR rose as banks started to panic just like in 2008. Only this time, banks were avoiding each others' toxic Greece debt instead of mortgage-backed securities.

(d)When history looks back on this period of time, one of the overarching themes will be debt. Countries have become overleveraged on every level. But it’s not the only problem facing Europe. Instead, there are three problems that are all self-perpetuating and feeding on one another.

First, some governments are too indebted and can no longer afford to pay the interest on their bonds. For example, in Spain, Italy and Greece, the cost of borrowing is high as there’s just no certainty about their finances and how their problems will be resolved.

The second problem is the banking system. Banks in stronger European countries, such as France and Germany, own lots of bonds from struggling European countries, such as Greece, Spain and Ireland. That’s not all: In Spain and Ireland, many banks have bad loans on their books as a result of their collapsing real estate markets.

Third, the European economy is decidedly not booming. In fact, it’s in a recession. The office of statistics for the European Union, Eurostat, announced in early September that the gross domestic product for the 17-country eurozone had contracted by 0.2 percent in the second quarter of 2012, compared to the first quarter when no growth was recorded.

Europe’s recession is no coincidence. These three problems feed off one another, depressing the EU economy, says Michael Klein, professor of international economic affairs at The Fletcher School of Law and Diplomacy at Tufts University.

“These are all interconnected because some of the bad assets that banks have are government loans, for instance, to Greece, where there’s a very high chance or certainty that the money won’t get fully repaid,” says Klein.

“So the banking crisis leads to less lending by banks, which leads to a slowdown in economic growth. All three aspects of it — the sovereign crisis, the banking crisis and the slow growth — reinforce each other, and it makes it difficult because you can’t solve one. You have to solve all three,” he says.

Hits Americans in the pocketbook

Participating in the global economy has benefits, but it also comes with perils in that economic catastrophes on the other side of the world can have real impacts here at home. For instance, the European debt crisis and recession affect American exports and the stock market. There are consequences for global trade and possibly for the American financial system as well.

“Exports are an important source of the American recovery, so if Europe tanks, there will be fewer exports to Europe, and that will hurt American manufacturing,” Klein says.

Not only does the European debt crisis directly affect American exports, it impacts other areas of the global economy, which further drags on growth here at home. For instance, “The recent slowdown in China has been attributed to weakness in Europe,” Klein says.

“Europe being in a prolonged recession has caused the global economy to slow down. And that has an indirect effect here in the United States in terms of adding to our unemployment problems. If worldwide demand were higher, there would be more jobs created for American workers,” says William R. Gruver, the Howard I. Scott clinical professor of global commerce, strategy and leadership at Bucknell University in Lewisburg, Pa.

Europe is not an insignificant part of global demand. Germany’s economy alone is the fourth largest in the world, by nominal GDP, followed closely by France, but collectively the economies of all 17 euro-area countries are nearly equal to that of the United States, at about $13 trillion versus $15 trillion for the U.S. according to data from the International Monetary Fund for 2011.

Though most Americans don’t keep up with the current account deficit, which reflects the imbalanced state of American imports and exports, they probably follow the stock market. Not only do markets twitch with every bit of news from Europe, but “25 percent of all the earnings from (Standard & Poor’s 500 index) companies (come) directly or indirectly from Europe,” says Werner Bonadurer, a clinical professor of finance at the W. P. Carey School of Business at Arizona State University.

That’s a big chunk of corporate profits that are shrinking.

Global currency devaluation

Sometimes countries intentionally devalue their currency to deal with financial problems. Currency devaluation makes imports expensive and exports relatively less expensive to trading partners. It may boost demand for products produced at home, which stimulates employment.

The financial crisis in 2008 pushed the U.S. to adopt monetary policies that led to a weaker dollar. The central bank in Europe is pursuing similar policies to address its debt crisis. Monetary easing makes sense when looking at one country’s economy, but in the global view, it could lead to problems.

“The Bank of Japan has been doing and did exactly the same. Brazil is trying to do the same. Switzerland has done it, too. If everybody does this, if everybody pursues competitive devaluations, it becomes irrelevant,” Bonadurer says.

Typically, the escalation continues, eventually leading to trade wars, protectionism and tariffs on certain goods from certain countries, none of which are conducive to global growth.

The banking system

The banking system throughout the world is closely linked. While fears of a financial contagion have been mitigated somewhat as the crisis has progressed, it’s still a real concern.

“That was a worry two or three years ago, when American banks and money market funds held much larger positions of securities issued by European banks. If the European bank failed, it would affect the American banking system because the assets held by American banks were securities issued by European banks,” says Gruver .

But Klein notes that U.S. banks still could be indirectly exposed to Europe. “If they don’t have direct exposure to Europe, they have direct exposure to banks that have direct exposure to Europe,” he says.

And, in a worst-case scenario such as a messy Greek exit from the euro currency, those connections may be a liability.

“Suppose the Greeks leave and reintroduce the drachma. People will leave Greek banks, and then banks collapse. The bank collapsing leads to other problems with other banks in other countries, and then people leave those banks. It can spread from country to country. There’s not a firewall or something to prevent that,” Klein says.

“Those are the nightmare scenarios keeping (American Treasury Secretary) Tim Geithner awake at night,” he says.A coin toss

Though the Greek situation is still tenuous, it’s likely the region will fumble through the crisis and eventually return to slow growth.

“The effect on American consumers will be more gradual and more indirect. Because there won’t be a rapid recovery in Europe, worldwide demand will remain sluggish, and therefore, it will be a drag on American employment, and that will be the main effect on the American consumer,” says Gruver.

Unfortunately, forcing struggling countries to survive on starvation rations won’t change the course of the crisis.

“I think the only way to get out of this mess is if you find the secret sauce of posterity … fiscal consolidation on the one hand and growth on the other hand,” says Bonadurer.That could only help everybody.

ref by-KIMBERLY AMADEO.

  THOMAS KENNY.

SHEYNA STEINER.