The United Kingdom and the Euro Crisis - Example

Choose two neighbouring EU countries, one based within the Euro zone, one based outside the Euro zone: compare and contrast how the countries have fared during the Euro crisis and how they have dealt with it. Contents Contents 2 Thesis statement 3 Introduction 3 Discussion 4 Euro crisis 4 Causes of the Euro zone crisis 5 Greece and the Euro crisis 5 The United Kingdom and the Euro Crisis 8 Summary and Conclusion 9 References 10 Thesis statement The main aim of the report is to choose two neighbouring European Union countries: one belonging to the Euro zone and the other belonging to the non euro zone and then comparing and contrasting the ways in which these two countries were impacted by the European sovereign debt crisis and the way they managed the same. For this purpose two countries, Greece and the United Kingdom are selected of which Greece is a Euro zone country and the United Kingdom is a non euro zone country. Therefore, the main thesis statement prepared for the report is as follows: To investigate and evaluate the ways in which Greece and the United Kingdom was impacted by the Euro sovereign debt crisis and to compare and contrast the ways in which these two countries managed to mitigate these crises. Introduction The European debt crisis is one of the biggest challenges faced by the European Union countries have faced since the 1990s. The euro debt crisis was triggered by the financial crisis of 2007-2008 and started in the third quarter of 2008. The crisis started from the member of the Euro zone, Greece and subsequently spread to the other European countries in both the Euro and non Euro zone. The sovereign debt crisis was severely noted in Ireland, Greece, Italy, Spain and Portugal. It also impacted the other non Euro zone countries like the United Kingdom, Poland, Sweden, Czech Republic, Romania, Bulgaria etc. This report outlines the Euro debt crisis and studies the same by selecting two countries from the European Union and analyzing how they were impacted by the Euro crisis and how these countries dealt with this sovereign debt crisis. The report includes a thesis statements followed by an analysis of what the euro crisis was and how two specific countries, one belonging to the Euro zone which is Greece and another belonging to the non euro zone, the United Kingdom dealt with the crisis. The report is summarized by highlighting the key findings and by suitable concluding statements. Discussion Euro crisis The European debt crisis is a significant multiyear debt crisis that has been taking place within a number of euro zone member countries since the last quarter of 2008. These countries were unable to refinance the government debts or repay the government borrowings or to even bail out the indebted banking institutions in their country without the support of third party institutions like the International Monetary Fund (IMF), The European Financial Stability Facility (EFSF) and the European Central Bank (ECB). The European debt crisis started in the wake of the Great Financial Recession in 2008 and was characterized by an external financial environment in which there were accelerating levels of debt and many government structural deficits. The countries which were hit by the European sovereign debt crisis faced a sharp increase in the interest rate spreads related to the government bonds and as a result of which the investors groups became highly concerned about the future sustainability of the debts. This concern of the investors rose to such a high extent that four countries in the euro zone had to be rescued by the government sovereign bailout system which were delivered by the European Commission and the International Monetary Fund (IMF) as a partnership initiative with a level of additional support from the European Central Bank (ECB). Altogether these three organizations represented the bailout creditors which were nicknamed as the Troika and helped to get a number of EU countries out of the crisis situation of which Greece and the United Kingdom were two main countries. Causes of the Euro zone crisis The euro debt crisis was a result of a number of complex factors which included the globalization of finances, the financial crisis of 2007-2008, the real estate bubbles that burst during the same period, the international trade imbalances, the fiscal policies formulated according to the government expenses and revenues, the assumption of socializing losses and private debt liabilities and the approaches used by the governments to bail out high debt incurring banking institutions and industries and the easy credit lending conditions in the period 2002-2008 which encouraged borrowing and lending practices involving higher levels of risks (Watts, 2008). The euro zone debt crisis unfolded itself as a time when the new government of Greece revealed that the previous government was under reporting the deficit of budget in the economy. The Euro sovereign debt crisis subsequently spread to the other countries in the Euro zone like Portugal and Ireland and also highlighted concerns regarding the banking systems of Italy, Spain and Europe. Also, the fast spreading of the euro debt crisis to other non euro zone countries indicated at a more fundamentally existing imbalance in the financial sectors of the European Union countries (Arikan, 2006). Greece and the Euro crisis Greece was one of the five countries that applied for the rescue funds from the international institutors for prepaying their due debts and for bailing out their financial segments. These five countries were Portugal, Spain, Cyprus, Ireland and Greece. In the staring of the mid 2000s, the economy of Greece was one of the fastest growing economies within the Euro zone. Also the economy was associated with a high scale structural deficit. In the event of the major economies of the world being hit by the Great Financial Crisis of 2008, the economy of Greece was majorly impacted because the main revenue generating industries of the country which were tourism and shipping were much volatile and vulnerable to the changes in the global business cycles. As a measure, the government of Greece made substantial investments to keep the economy functional and the debt of the country increased accordingly. In spite of the upward revisions in the 2009 budget deficit forecast of Greece. The borrowing rates in the country increased in a very slow pace and by the first quarter of 2010, it was evident that Greece was becoming unable to access borrowings from the markets. The Greek government tried to mitigate the Euro sovereign debt crisis by appealing for loan from the European Union (EU) and the International Monetary Fund (IMF). Initially the country accessed 45 billion Euros for covering its financial requirements for the rest of the year 2010. After this strategy, the sovereign debt rating of Greece by Standard and Poor was given as BB+ which resulted in the debt status of the country gaining a junk status (Blair, 2010). This gave rise to the increasing fears of the investors regarding the default of loans in which case the investors were likely to lose 30%-50% of their investments. Also, the stock markets across the globe crashed and the Euro as an internationally traded currency declined sharply in response to the collapse of the stock markets (Bourdieu, 2005). The fact that the amount of debt within the country exceeded USD 400 billion which was over 120% of the total Gross Domestic Product (GDP) of the country struck terror among the investor groups. France owned more than 10% of this debt amount and thus credit default was a highly anticipated fear among the investors. Although the market reactions were sluggish, the yields of the 10 year government bonds traded in the country increased by a mere 7% in 2010 and coincided with many other drivers that fuelled the Euro sovereign debt crisis (Guay, 2014). The Greek economy was bailed out with 110 million Euros direct loan funded by the International Monetary Fund (IMF) and the European Union (EU) as a combined effort. The Greek government also formulated a wide array of austerity measures which were aimed at securing a three year period 110 billion loan (Chang, 2009). Also, the Greek government continuously took support from the Troika which is a tripartite committee including the European Central Bank (ECB), the International Monetary Fund (IMF) and the European Commission (EC). After accessing loans for bail out several times form the Troika, Greece was able to improve the overall outlook of the economy with an improvement in the real GDP growth in the year 2014, the increase in the government structural surplus from 2011-2014 and a noticeable reduction of the rate of unemployment in the country in the same period. During 2014, it became possible for the Government of Greece to return into the government bond trading markets which enabled the government to completely finance the new financing gaps that were noted in the economy, through the use of the surplus private capital invested in the bonds of the country. The establishment of a precautionary system of Enhanced Conditions Credit line (ECC) formulated by the European Stability Mechanism is expected to improve the ways in which Greece has been able to control the impacts of the Euro debt crisis on its economy (Dinan, 2010). The ECCL is used by Greece as a follow up way to ensure that the state does not have to access more sovereign bailout assistance and that the mechanism will have a stabilizing effect on the financial markets because of the presence of the backup mechanism to protect the investments of the investors. The United Kingdom and the Euro Crisis Though the main currency used in the United Kingdom is not the Euro but the British Pound, yet the Euro debt crisis had profound implications on the economy of the United Kingdom because the trading and investments in the European Union are highly interconnected and interdependent (Johnson and Turner, 2006). There have been two major aspects of the Euro zone financial crisis on the United Kingdom. These include a banking crisis in which the Euro zone banks have faced difficulty in borrowing money from other banking and financial institutions, especially in the foreign currencies like the US dollar and a government debt crisis in which the European Government has experienced a sharp and rapid increase in the borrowing costs (Suder, 2011). Both of these crises could spill over into the financial markets of the United Kingdom. The banks in the United Kingdom had limited exposure to the countries which have been deeply affected by the Euro crisis. However, the UK banks have a high degree of direct exposure to the banks in countries like Ireland and France. In turn, the French banks have high amounts of landings given to Spain and Italy (Antonenko and Pinnick, 2009). Therefore, if the major banks in these countries went bust, then the banks of the United Kingdom would have severe difficulty in accessing funds from the European Union markets. As such, the government of the United Kingdom took specific measures to reduce the impact of the Euro debt currency on its economy and financial sector (McCormick, 2014). The government of the United Kingdom is trying to manage the effects of the Euro debt crisis by formulating new monetary policies that would strengthen the position of the borrowings in the country (Chesnais, Ietto-Gilles and Simonetti, 2000). Since, the country does not use the Euro as its currency, therefore, the direct impacts of the Euro debt has been much lesser than in Greece. However, in light of the crisis, the government of the United Kingdom has had to develop the credit positions so that the banking institutions do not reach a situation where the investments may fear the defaults and losses in their investments. Summary and Conclusion Thus, it can be summarized that the ways in which the two countries, Greece and the United Kingdom were affected by the Euro debt crisis are much distinct. The primary reason for this is that Greece is a European Union country which belongs to the Euro zone while the United Kingdom is a neighbouring European Union country that is not a Euro zone member. Therefore, the effects of the Euro crisis on the economy of Greece have been much magnified and indirect in nature. In contrast, the impact of the same on the economy of the United Kingdom has been indirect and much lesser in magnitude. Thus, Greece has had to take help form the international committees like the Troika to bail out the economy quite a handful number of times. In contrast, the United Kingdom could manage the euro debt crisis to a high extent by strengthening the borrowing systems in the financial sector of the country. References Antonenko, O. & Pinnick, K. 2009. Russia and the European Union: Prospects for a New Relationship. Abingdon: Routledge. Arikan, H. 2006. Turkey and the EU: An awkward candidate for EU membership? 2nd Ed. Aldershot: Ashgate. Blair, A. 2010. 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