Describe the how the European Debt crisis came about. What has been some of the outcomes...

Describe the how the European Debt crisis came about. What has been some of the outcomes of the European Debt crisis.

Expert Solution

Firstly, there were no penalties for countries that breached the debt-to - GDP ratios set by the Maastricht Criteria founding the EU. This is because France and Germany were also spending above the limit, and sanctioning others would be hypocritical until they got their own houses in order. There was no teeth in any sanctions except expulsion from the eurozone, a harsh punishment that would weaken the euro 's power itself. The EU was looking to boost the influence of the euro.

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, and this increased liquidity raised wages and prices—making their exports less competitive. Countries using the euro couldn't do what most countries do to cool inflation: raise interest rates or print less currency. During the recession, tax revenues fell, but public spending rose to pay for unemployment and other benefits.

The UK and many other EU countries that do not form part of the eurozone balked at Merkel 's deal. They worried that the treaty would bring in a "two-tier" EU. Eurozone countries could only create preferential treaties for their members and exclude the non-euro EU countries.

Countries in the eurozone must agree to budget cuts which could delay their economic development, as they have in Greece. Those austerity measures were unpopular politically. Voters could vote in new leaders who might exit either the eurozone or the EU itself.

Rahul Sunny answered 2 years ago

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