Economics management assignment on: Euro – zone debt crisis

What were the main causes of the Euro – zone debt crisis of 2010/2011, and what have been significant policy responses to that crisis?The slowdown within the Euro exchange rate as compared to the dollar has been reported to be approximately 15 percent or more in the beginning of the year. This has been reported to be due to the financial as well as economic crisis which took place within the world crisis. It was seen that, one of the Euro – Zone members i.e. Greece was the only edge amongst the main defaulters. In the meantime, Euro was continued to devaluate its prices dipping below than 1.20 dollars. It must be taken into consideration that, the rate of Euro actually returned to 2003 after being one of the “most expensive Euros”. In the year 1999, the Euro was traded at an approximate value of 1.1.7 dollars (Slay, 2011). Whereas, in the year October it was reported to be quite low such as 0.82 as compared to the US currency i.e. the dollar. By mid 2010, the value of Euro started to recover itself thereby surpassing the 1.25 dollar benchmark which was termed with the long run European currency.It has been stated that, the European sovereign debt crisis has been referred to as an ongoing crisis in terms of finance. This financial crisis has made it difficult for many countries to re-finance the debt by the government without assisting the third parties. In late 2009, the debt crisis has been developed to amongst the investors which would either result in public or government debt within the European states. It has been seen that, the causes for the same are quite varied in nature (Slay, 2011). In many countries, the private debts have raised from the property bubbles which would lead to the transfer of the sovereign debt resulting amongst the banking bailouts, responses to the government within the slow economies. It is well stated that, in Greece the public sector as well as the pension commitments have led to an increase in the overall debts of the same. The entire structure of the Euro-Zone as a part of the monetary union apart from the fiscal union such as polices, taxation, pension rules, etc has led to have an impact over the European leaders. The various European banks have large amounts of sovereign debts which would mainly take into consideration the solvency within the banking systems, etc (Ciancio & Clark, 2012).

Some of the causes which led to the crises within the European economy in the year 2010 have been described in the following portion of the essay.The crisis within the European countries have led to high levels of crisis have been resulted due to many causes or complex factors which include the globalization of the economy, credit conditions during the time period 2002-2008, high risks attached with lending, borrowings, global financial crises in the year 2007-2012, trade imbalances, bubbles noticed within the real estate sector, global recession hits the entire economy, fiscal policy which relates to the expenses, revenues, nations bailout, bondholders, etc (Ciancio & Clark, 2012).While describing the causes for crisis it would be quite relevant to begin with a significant rise in the levels of investment during the time period 2000-2007. This giant pool of money has led to an increase in the overall levels of savings amongst the developing countries that have entered the capital markets globally. The investors have been searching for high yields as compared to the US treasury bonds which are available in the markets globally (Slay, 2011). The main temptation which have been offered by the readily available savings are the policies as well as the various regulatory control mechanisms in a country which yields fixed income for the investors in search for the yield in generating bubble all across the globe. The bubbles have burst which has led to a decrease within the prices of the assets, liabilities of the global investors, to generate questions regarding solvency of the government along with the banking systems.

Rising government debt levelsIn the year 1992, the members of the European Union (EU) have signed a treaty with the Maastricht Treaty which would limit itself within the deficit spending along with the levels of debt. However, there are many EU members such as Greece & Italy which will not be able to circumvent the various rules as well as the masks deficit with the help of complex currency & the derivatives structures. The entire structure has been designed for the US investment banks who receive substantial amount of fees in return to the services. With the adoption of the Euros many countries included within the euro-zone would have different credit worthiness which are low on interest along with the bonds before the crisis was held (Ciancio & Clark, 2012).

Rising government debt levelsFirstly, the main cause of Euro crises has been estimated to be because of the rise in the debt levels of the government. In the year 1992, the European Union (EU) had signed a treaty which would help in order to pledge a deficit spending as well as the levels of debt. The members covered with the European Union (EU) such as Greece & Italy avoided such types of rules & masks the levels of deficit along with the levels of debt. This has led to the use of the various types of currency & credit derivatives. The entire structure has been designed for the prominent banks situated within United States who receive high levels of fees in return to such type of services. With the adoption of the Euro’s, the Euro-Zone counties within the different types of credit worthiness helped to receive low levels of interest rates from the bonds within the years early from the crises (Slay, 2011).

Trade imbalancesAccording to the commentator as well as the journalist of Financial Times it has been asserted that, the root cause of the crisis is the increased trade imbalance. It has been noted that, during the period of crises i.e. 1999 – 2007, Germany had a better public debt as compared to the fiscal deficit relative to the GDP which has affected many of the euro members. Within the same period, the countries such as Italy, Portugal, Spain & Ireland have been quite worse with respect to the balance of payments (Dadush, 2010). Whereas German trade surpluses increased as a percentage of GDP after 1999, the deficits of Italy, France and Spain all worsened.

It was written by one of the columnists that, the trade deficit has been defined as a process which would lead to an inflow of the capital thereby leading to a decline in the overall rate of interest which would stimulate the creation of the bubbles.  For instance, the inrush of the capital within the wealth of the countries has led to a rise in the prices of the assets, rise in the price of the currency, building strong currencies, etc. The bubbles have been made sooner or later due to the miracles within the economies which have become basket cases & the debts of whom are not real. Such type of debts will have a heavy burden as the number of loans would be denominated within the currencies of some other currencies (Dadush, 2010).The deficit within the trade would affect the changes within the cost of labor which has made the entire nation less competitive as well as have increased trade balances within the same. In the year 2001, in Italy the unit cost rose up to 32% (Ciancio & Clark, 2012) which has been reported to be quite fast as compared to the last few decades. In most of the EU nations, there has been an increase within the cost of labor as compared the German economy. The cost of the labor was restrained within the German economy which has lead to one of the questionable factors within trade balances. This has been attached with the rate of unemployment attached to it. Recently, it has been seen that during the period 2011 – 2012 the position of Greece has improved. In this period the levels of imports have dropped to 20.9% & the levels of exports were increased by 16.9%. This has led to an overall change within the trade deficit by 42.8% (Dadush, 2010).Moreover, the Euro-Zone countries such as Germany with the maintained trade surplus were unable to see an appreciation within the levels of currency as compared to the other Euro-Zone countries. Germany has been reported to have trade surplus within the Euro-Zone which declined in the year 2011. Attached with such type of Euro-Zones, the trading partners were able to find financing as one of the key funds within their trade deficits whereas the trade surplus within Germany has soared as well as the Euro has declined the value of dollar & other currencies (Ciancio & Clark, 2012).

One of the major causes which have been seen in regards to the Euro crisis is the structural problem within the Euro-Zone system. There has been a structural contradiction within the Euro systems such as fiscal & monetary unions. Within the Euro-zone, the countries have been offered to have a similar path but will not have a common treasury to enforce on it. This means that, the countries which have similar types of monetary systems would have a freedom within the fiscal policies or taxation along with the levels of expenditure involved. Even though there are many agreements over the monetary policies but the European Central Bank might not be able to follow it (Dadush, 2010). Therefore, this feature led to the riding of the peripheral economies, national institutions, etc. Furthermore, there are problems which are associated with the Euro-zone system as well as the response from the same, within the Euro-zone there are approximately 17 nations which would led to a unanimous decision making.  This will lead to high levels of failure within the completion of the contagion as well as to have a quick response of the problem. It has been said by one of the columnists that, In Europe the hyper connectedness has been exposed within some of the economies along with the levels of freedom they have got within the same (Ran, 2010).

Lastly, the monetary policy inflexibility has been referred to as one of the main cause which has led to an economic crisis within the same. The membership of the Euro-Zone has established single monetary policies wherein the individual member will not be able to cat independently as well as they were not allowed to print more amounts of money so as to pay the creditors as well as minimize the levels of risks (James, 2012). By “printing more money” means that the county currency would be devalued as compared to the Euro-Zone partners which would make the exports cheaper as well as a principle would be implemented in order t improve the balance of trade (BOT), tax revenues as well as increased GDP within nominal terms. In the opposite direction, it can be seen that the assets which are held in as the currency have suffered high levels of loss apart from holding them. To have a better understanding, an example has been quoted. The example is as follows, in the year 2011 a 25% fall was reported within the rate of exchange which led to an increase in the rate of inflation by approximately 5%. The investors within the Euro-Zone have locked their money within the Pound Sterling which has suffered approximately 30% cut within the repayment of the debt (Ciancio & Clark, 2012).There are various policies which have been used in order to get rid of the economic crises. Some of the policies have been discussed as under. The industry ministry was quite disappointed with the euro zone efforts in order to resolve the crises. Europe was more disappointed as expected. It is quite capable of tackling the minor problems. The recent public disputes within the Italian ministers have dented in retaining high levels of international credibility. Speculation has been done in order to reach the policy of the euro crisis which would help in the devising prompt strategies for the banks in order to have a safe as well as riskless sell off (Dadush, 2010).

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