The
main aim of EU was to establish economic Integration but due to some
reasons it had led Global Economic Crisis. Eurozone Debt crisis has
resulted from a combination of complex factor.The reason for Euro zone
crisis are discussed as follows:
1: Rising government debt levels
Government
debt of Eurozone, Germany and crisis countries compared to Eurozone GDP
Government deficit of Eurozone compared to USA and UK In 1992, members
of the European Union signed the Maastricht Treaty, under which they
pledged to limit their deficit spending and debt levels. However, a
number of EU member states, including Greece and Italy, were able to
circumvent these rules and mask their deficit and debt levels through
the use of complex currency and credit derivatives structures.
2: Monetary policy inflexibility
Since
membership of the eurozone establishesable to "print money" in order to
pay creditors and ease their risk of default. (Such an option is not
available to a state such as France.) By "printing money" a country's
currency is devalued relative to its (euro zone) trading partners,
making its exports cheaper, in principle leading to an improving balance
of trade, increased GDP and higher tax revenues in nominal terms.
3: Trade imbalances
During
1999-2007, the countries (Portugal, Ireland, Italy and Spain) had far
worse balance of payment positions. Whereas German trade surpluses
increased as a percentage of GDP after 1999, the deficits of Italy,
France and Spain all worsened. More recently, Greece's trading position
has improved in the period November 2010 to October 2011 imports dropped
12% while exports grew 15% (40% to non-EU countries in comparison to
October 2010).
4: Loss of confidence
Prior to
development of the crisis it was assumed by both regulators and banks
that sovereign debt from the eurozone was safe. Banks had substantial
holdings of bonds from weaker economies such as Greece which offered a
small premium and seemingly were equally sound. As the crisis developed
it became obvious that Greek, and possibly other countries, bonds
offered substantially more risk.
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