Eurozone Crisis And Governance Essay

1825 words - 8 pages

Problems
When the United States started to have their financial crisis it also started problems in the Eurozone. This as a result stopped the credit from being available to most countries, and none of them were able to borrow to pay off the debt that has accumulated over the years. This caused a standstill with no one being able to pay off any of their programs that they were finding and as a result many nations suddenly many nations were in a huge crisis. This resulted in the bankruptcy in Greece, were Germany had to pay off their debt.
Due to Germany being the most stable and strongest economy at the time with some of the most money under them they were set to control the European Union. ...view middle of the document...

This can be a big problem since Germany is very financially structured in the way they spend and borrow. If they tried to implement their own ways on these countries whose citizens don’t usually pay taxes results in problems.
Austerity measures would mean many problems for the country as it cannot repay its debt that it has since it doesn’t make any money. As it was seen when they were implanted in the Eurozone. They did not show evidence of improving the country.
The ECB also started raising the interest rate, which discouraged many countries from taking on more loans which can be seen if figure 1 and figure 3. As interest rates were going up the rates of loans in the Euro area started going down further trying to strengthen the Euro. Germany with all the pressure it was receiving internationally from at the other countries had to stabilize it. Which they did by allowing investors to feel more confident with the amount of risk they were taking when they were repaying the debt that they had to pay off. This allowed for money to come into the ECB to stabilize the currency and tried to save the other countries as well.
With the sudden decrease in the amount of buying power with many of the nation’s not being able to fund many of their projects they are now struggling with recession. Which shows that many countries are now being fairly counterproductive from where they once were but are getting better as seen in figure 4.
Figure 4

Source: IMF

This chart shows that since the crisis many nations were not able to recover to the point where they once were and are slowly recovering but at an extremely low rate. As a result form trying to stabilize the economy the European Union may have caused countries to almost go into recession. This as a result is causing many members who are having trouble try to change the European Union’s opinion on the measures that they have taken.
Figure 5 can also show how the relationship between countries austerity measure and their GDP growth rate over a four year period.

Figure 5


There was some analysis done by Economist Martin Wolf between cumulative GDP growth in 2008 – 2012 and the total reduction in the budget deficits due to austerity measures. There was also work done by economist Paul Krugman who analyzed relationship between GDP and reduction in budget deficits and he concluded that austerity measures were slowing growth.
Many countries that had to go on austerity measures caused their budgets to decrease over time due to the measures taken. They also had public to debt ratios that increased except for Germany, it is calculated by taking public debt and dividing it by GDP. Public debt is the money owed to investors by the government. The greater the ratio the greater the amount of debt the country has compared to the size of its economy which is unfavourable for that country. Figure 6 shows all countries debts have increased their debt to GDP ratio because of austerity other than Germany.

Figure 6

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