The countries had fallen into a debt trap and there was problem of cash crunch and liquidity crisis in the banking sector. Thus the Euro zone faced both fiscal and monetary policy problems along with a slowdown of the economies. The main reason behind this is the common monetary policy that these countries have owning to the adoption of the Euro currency across the entire zone but different fiscal policies for each of the countries. The countries of this zone had decided to limit their borrowings to a certain designated level but they could not restrict the borrowings to that level (Feldstein, 1997, p.31). Thus there was a problem of convergence for all the countries that came under this zone. Spain Economy before and after the Crisis Since the year 2004, in the post election era, the economy of Spain has experienced a steady growth rate. This was followed with a boom in the housing market clubbed with a hike in the oil prices. However, the trade deficit of the country continued to increase along with an increase in the rates of inflation. The housing bubble that took place in Spain faced a set back and the country fell into a complete debt trap which led to this financial crisis. This continued till 2011, with the trade deficit accounting for, as high as 8.5% of the GDP. The country faced a rating downgrade along with the crisis in the banking sector due to shortage of liquidity. The growth rate of Spain encountered a sharp decline from the year 2008, in the post financial crisis period of the US. From the above graph it is evident that the growth rate of the country started falling drastically after this period and hit the bottom in the year 2009. However, even after recovering from it in 2011 it again faced a jolt in the pre 2012 period owing to the euro zone crisis (Weisbrot and Montecino, 2010, p. 9). The reasons behind this fall in the growth rates was the over valuation of the exports of the country, the attempts of the government of Spain to cut the spending and the bursting of the housing market bubble. During the 2004, post election period, the country had faced a decrease in the unemployment rate which reflected the prosperity of the economy of Spain. However the rate of unemployed rose sharply and reached the peak in 27.2 % in March 2013 and it had mainly affected the youth of the country. The lack of flexibility in the labour market was the chief reason for such employment conditions. The above graph shows that the Spanish government has presented a deficit budget since the year 2009 and this budget deficit was 9.4% in 2012. This had happened mainly because of the huge debt burden that the country had entangled itself into. The country had to provide for the high percentage of unemployed people in the country (Tremlett, 2011, p.1). Along with this the tax revenue also decreased due to the presence of recession in the economy. The debt that the government of Spain owed also had a drastic increase which is shown in the graph below. The condition of the monetary system of Spain was such that the rate of interest for long term bonds was at 7% which almost touched the critical level. The Spanish government did not have the capacity for Seigniorage. Hence the Spanish money markets faced with the problem of liquidity which in turn increased the rates of interests. The inflation rate also went below the critical level marked in
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Current International Debt Crisis (Spain Crisis) Contents Contents 2 Euro zone Crisis 3 Spain Economy before and after the Crisis 3 Sovereign Risk and its Effect on Spain 7 Whether Spain should leave the Euro zone to save the Euro Currency from a German Tax payer’s point of view 7 References 9 Euro zone Crisis The debt crisis has affected all the countries that belong to the European Union since 2009…
Frustrations of farmers getting demonstrated through blockage of border crossings, highways or ports, clearly indicates that Greeks have become distressed having no intentions to let go (Poggioli). Uncontrolled expenditure, inexpensive loans and failure to execute monetary transformations over a couple of years has left Greece in a very poor condition when the worldwide financial recession had hit.
13 Print. 13 13 The European Sovereign Debt Crisis during 2010-2011 Background of the Financial Crisis The ‘Sovereign Debt Crisis’ is a serious havoc in the securities’ global markets, which make it difficult for universal “European Monetary Union” associates, to fund their budgets (Viana 2).
Defaulting loan creditors increased in number across the continent of Europe and this led most banks’ grappling with what their next move would be. The financial institutions of many European countries collapsed; there was increased government debt. This began in the early 2008 with the banking system of Iceland collapsing.
What Role Should The European Central Bank Play In The Current European Financial Or Public Debt Crisis?
The European Union’s central bank is the organization that should be responsible for the administration of the monetary policies of the seventeen member countries in the Euro zone.
The three plans are creations of American economists who were striving to avert the economic crisis that was facing Latin America countries during the eighties. The economists’ Baker and Brady devised the strategies on behalf of the US treasury (Brauch 50).
However, Wallison (2012, p. 71) expressed the view that “in a true sovereign debt crisis, a country cannot meet its debt obligations, largely because it does not have enough of the currency in which its debt is denominated.” The European sovereign debt crisis began in 2008 with the banking crisis in Ireland with the contagion of the crisis spreading out to Greece, Ireland and Portugal in 2009 (Investopedia 2012).
Many European countries under the Maastricht have clubbed together their monetary authorities under the rules and regulations of the European Central Bank (ECB). All these nations were combined together and were known as the European Monetary Union (EMU).
The level of government spending increased dramatically after Greece joined the Eurozone and adopted the Euro as its official currency. A generous public sector meant that the government spent increasing amounts on public sector salaries while GDP did not grow in proportion.
The economists’ Baker and Brady devised the strategies on behalf of the US treasury (Brauch 50). The schemes devised are effective in solving the crisis that is facing the European Union. This is because the challenges of the EU are