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Understanding European Debt Crisis

by admin on February 13, 2013

Understand the European debt crisis

European countries specifically Greece, Spain, Ireland, Portugal, and Italy has been experiencing very serious economic problem that poses danger to the economic situation in the world. These countries have failed to pay the debt from bondholders that cause consequences that greatly affect the entire world.

The global recession is what made the serious economic problem in European countries exposed. The failure of these countries to carry out fiscal reforms has worsened the situation of its economic growth. Because of this, tax revenue weakened thus making it hard for them to deal with the country’s budget deficit. It was in 2009 that George Papandreou, Greece’s Prime Minister announced the failure of the previous leadership to reveal the huge deficit of the country.

Because of this the investors demanded higher yields for the bonds given to these countries which resulted to seeking many bailouts from the European Union as well as from the European Central Bank. Bond yields have been rising because it is a security in the part of the investor where their investments are at risk. They are demanding higher return to ensure that their investment will not go to nothing. Losing the confidence of the investors has a tremendous effect to the country weakening economic condition which is referred as contagion.

The move of the European Union has been so slow because it needs the consent of the rest of the members of Eurozone. The primary solution to the economic dilemma of these countries in Europe was to resort to bailouts. The members of Eurozone founded the “European Financial Stability Facility” which aims to help the countries who are experiencing financial problems by lending funds to them. European Central Bank has also become involved in purchasing government bonds to prevent the yields from increasing. Continues on rising of yields has made it more difficult for the concerned European countries to be able to pay its debt. 

The policy makers in the European world have been thinking how to help to stabilize the economy of the concerned countries. The government was forced into an agreement that they will cut off the budget as well as raise taxes which has caused public outcry and protests from its constituents. There have been hunches that one of the countries in Europe will live their currencies which will surely be rocketing down thus the value of the money will weaken.

Continues default in paying the debt will only result to more weakening of its economic situation. The worst scenario is when the countries that are involved in it will be removed from the Eurozones which means that the value of their money will no longer be Euros thus, making the European countries weak too. Furthermore it will also affect other countries economic stability.

The information blocking about the true situation of the financial status of the country has worsen its economic condition. Furthermore it has also an inefficient tax system that made it more difficult for Greece to stabilize its economic growth.

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