The European debt crisis is a long-running financial crisis that has made it difficult or impossible for several euro-area nations to repay or refinance their government debt without the help of third parties.
The European sovereign debt crisis arose from the eurozone’s structural problem and a complex set of factors, including globalisation of finance; easy credit conditions between 2002 and 2008, which encouraged high-risk lending and borrowing practices; the 2008 global financial crisis; international trade imbalances; real-estate bubbles that have since burst; the 20082012 global recession; fiscal policy choices related to government revenues and e-government.
One explanation for the crisis begins with the large growth in savings available for investment between 2000 and 2007, when the worldwide pool of fixed-income securities grew from over $36 trillion in 2000 to nearly $70 trillion by 2007. As savings from high-growth developing countries entered global financial markets, this “Giant Pool of Money” grew. Investors looking for higher returns than those offered by US Treasury bonds looked for alternatives around the world.
As lenders and borrowers put these resources to use, building bubble after bubble throughout the globe, the temptation posed by such easily available savings overpowered policy and regulatory control systems in nation after country. While these bubbles have burst, causing asset prices (such as home and commercial property) to fall, the liabilities due to global investors have remained unchanged, raising concerns about governments’ and banking systems’ viability.
Each European country affected by the crisis borrowed and invested money in a different way. Ireland’s banks, for example, provided money to property developers, resulting in a large property bubble. Ireland’s government and taxpayers assumed private loans when the bubble crashed. In Greece, the government boosted its promises to public employees by providing extraordinarily generous wage and pension benefits, with the former more than doubling in real terms during a ten-year period. Iceland’s banking system exploded, resulting in obligations to international investors (external loans) that were many times the country’s GDP.
Because the global financial system is interconnected, if one country defaults on its sovereign debt or goes into recession, putting some external private debt at danger, creditor countries’ banking systems will suffer losses. In October 2011, for example, Italian borrowers owed French banks $366 billion (net). Should Italy be unable to fund itself, the French banking system and economy could be put under tremendous strain, affecting France’s creditors and other stakeholders. Financial contagion is the term for this. The concept of debt protection is another component that contributes to interconnectedness. Credit default swaps (CDS) were contracts put into by financial institutions that result in payment if a debt instrument defaults (including government issued bonds). However, because numerous CDSs can be acquired on a single security, it’s unknown how much CDS exposure any country’s financial system now has.
With the use of derivatives devised by large banks, Greece, Italy, and other nations attempted to artificially decrease their budget deficits, misleading EU officials. Although certain financial institutions definitely gained in the near term, the crisis was preceded by a long period of uncertainty.
Is Europe experiencing a downturn?
According to the OECD’s current Interim Economic Assessment, the global economy is weakening, with key European countries experiencing a recession that is now affecting the rest of the world.
The G7 economies are forecast to grow at an annualised rate of only 0.3 percent in the third quarter of 2012, and 1.1 percent in the fourth, according to the Assessment, which was delivered in Paris by Chief Economist Pier Carlo Padoan. It cautions that the ongoing eurozone crisis is eroding global trust, stifling trade and employment, and hurting economic development in both OECD and non-OECD nations (see the presentation by the Chief Economist).
“Mr Padoan stated, “Our prediction suggests that the economic outlook has eroded dramatically since last spring.” “If politicians do not address the underlying reason of this worsening, which is the ongoing euro zone crisis, the slowdown will continue.”
According to the OECD, the euro area’s three largest economies – Germany, France, and Italy will contract at an annualized pace of 1% in the third quarter and 0.7 percent in the fourth.
Individually, the German economy is predicted to decrease by 0.5 percent in the third quarter and 0.8 percent in the fourth quarter. The French forecast is slightly brighter, with third-quarter contraction of 0.4 percent annualised followed by a 0.2 percent increase in fourth-quarter growth. The terrible recession in Italy will continue, with GDP decline of 2.9 percent in the third quarter and 1.4 percent in the fourth.
The poor economic prognosis is anticipated to bring unemployment even higher than it is now. “Mr Padoan stated that “resolving the euro area’s financial, budgetary, and competitiveness difficulties remains the key to recovery.”
Despite the fact that the United States is being impacted by the eurozone slowdown, growth is expected to be 2% in the third quarter and 2.4 percent in the fourth. Canada’s economy is expected to expand by 1.3 percent in the third quarter and 1.9 percent in the fourth. The Japanese economy is expected to fall by 2.3 percent on an annualized basis in the third quarter and remain around zero in the fourth.
“The forecast is threatened by a number of downside risks, including the possibility of further increases in already high oil costs, severe fiscal contraction, as seen in the United States in 2013, and further decreases in consumer confidence connected to prolonged unemployment,” Mr Padoan added.
Journalists should contact the OECD’s Media Division (tel: +33 1 4524 97 00) for more information.
Why is Europe’s economic development so slow?
The World Bank published a report on Europe’s growth model in early 2012. (Gill and Raiser 2012). We determined that Europe’s growth model had functioned successfully for the last 50 years after looking at six key parts of the model: trade, finance, entrepreneurship, innovation, labor, and government. Through the dynamics of economic integration, Europe had elevated 200 million individuals from medium to high income. European businesses had increased productivity, exports, and employment, and Europeans had lives that were the envy of the rest of the world. While Europe’s growth model was not broken, it could be better. Governments in Europe were inhibiting economic progress because they had grown enormously in size without becoming correspondingly efficient. The labor markets and social security systems in Europe were straining to adapt to the reality of an aging population. Too many European enterprises had failed to innovate, and Europe had failed to capitalize on significant gains from service integration, particularly in modern services.
Was Europe affected by the Great Recession?
The Great Slump originated in the United States, and the European recession is a component of it. The crisis quickly extended across Europe, affecting much of the continent, with many nations already in recession as of February 2009, and the majority of others experiencing significant economic setbacks. The global recession began in Europe, with Ireland being the first country to experience a downturn from Q2 to Q3 2007 followed by transitory rebound in Q4 2007 and then a two-year slump.
How did Europe deal with the financial crisis?
What was Europe’s response to the financial crisis? By choosing a multiparty coalition, raising tariffs and taxes, and regulating the currency, Britain retained democracy. France remained a democratic country as well. Scandanavian countries fared similarly well under socialist regimes.
Who owns the debt of Europe?
For the EU, debt securities made up 81.8 percent of total government debt, loans made up 15.1 percent, and currencies and deposits made up 3.2 percent. Debt securities made up 82.1 percent of the general government debt in the EA-19, loans made up 14.6 percent, and cash and deposits made up 3.3 percent.
At the end of 2020, debt securities were the most commonly utilized debt instrument in 25 of the 27 EU Member States, ranging from 19.7% of Maastricht debt in Greece to 93.4 percent of general government debt in Czechia.
Greece, Estonia, and Norway all had high loan percentages, with loans accounting for 78.4 percent, 57.9 percent, and 58.1 percent, respectively. Cyprus (32.9 percent), Sweden (32.7 percent), and Croatia (32.7 percent) also have significant loan-to-total-debt ratios (29.6 percent ). Countries that reported a higher share of loans tended to have a relatively low level of general government gross debt (e.g. Estonia), a relatively high share of debt held by subcentral government sectors (e.g. Sweden), or had benefited in recent years from EFSF, ESM, IMF, and other international assistance loans (e.g. Greece and Cyprus).
Currency and deposits accounted for less than 5% of total debt in 22 nations at the end of 2020. Currency and deposits, on the other hand, accounted for 12.2% of total general government gross debt in Portugal (because to saving certificates), 10.9 percent in Ireland (related to defeasance structures), and 8.9% in Italy (due to defeasance structures) (due to saving certificates).
Will the US economy enter a downturn?
The US economy will have a recession, but not until 2022. More business cycles will result as a result of Federal Reserve policy, which many enterprises are unprepared for. The decline isn’t expected until 2022, but it might happen as soon as 2023.
Which EU country has the most powerful economy?
In 2020, Germany’s economy was by far the greatest in Europe, with a Gross Domestic Product of nearly 3.3 trillion Euros. The United Kingdom and France, which have similar economies, were the second and third largest economies in Europe this year, followed by Italy and Spain.
What happened to cause the Great Recession?
The Great Recession, which ran from December 2007 to June 2009, was one of the worst economic downturns in US history. The economic crisis was precipitated by the collapse of the housing market, which was fueled by low interest rates, cheap lending, poor regulation, and hazardous subprime mortgages.
What is the state of Europe’s economy?
After the US dollar, the euro is the world’s second largest reserve currency and the second most traded currency. The euro is used by 19 of the eurozone’s 27 members, and it is the official currency of 25 eurozone countries and six other European countries, either officially or de facto.
The European Union’s economy is made up of a mixed economy internal market based on free market and progressive social models. For example, an internal single market with free movement of commodities, services, capital, and labor is included. In 2018, the GDP per capita in China was $43,188, compared to $62,869 in the United States, $44,246 in Japan, and $18,116 in the United States. GDP per capita (PPP) varies significantly between member nations, ranging from $106,372 in Luxembourg to $23,169 in Bulgaria. The European Union has a more equal income distribution than the global average, with a Gini coefficient of 31.
In 2012, the European Union invested $9.1 trillion in foreign countries, while foreign investments in the EU totaled $5.1 trillion, by far the greatest foreign and domestic investments in the world. Euronext is the Eurozone’s major stock exchange and the world’s sixth largest in terms of market capitalization. The United States, China, the United Kingdom, Switzerland, Russia, Turkey, Japan, Norway, South Korea, India, and Canada are the European Union’s top trading partners. By the end of the second quarter of 2020, real investment in the European Union had fallen by 14.6 percent compared to the fourth quarter of 2019. By the second quarter of 2021, it had recovered and had restored to its previous level.
Since the start of the public debt crisis in 2009, two economic conditions have emerged: a greater unemployment rate and public debt in Mediterranean nations, with the exception of Malta, and a lower jobless rate and faster GDP growth rate in Eastern and Northern member countries. In 2018, the European Union’s public debt was 80 percent of GDP, with Estonia having the lowest percentage at 8.4 percent and Greece having the highest at 181.1 percent.