The European Debt Crisis

On Tuesday, we talked on class about the economic crisis of Europe. The European crisis is the name given to the Europe's fight to pay the debts it has built in recent decades. Greece, Portugal, Ireland, Italy and Spain failed to pay back bondholders the guarantee it was intended to be. This is one of the most important problems of the world's economy. How did the crisis begin? Greece was the first to feel the crisis. The growth solews, so tax revenues did also, making high budget deficits unsutainable. Investors responded by demanding higher yields on Greece's bonds, wich raised the cost of the country's debt burden and necessitated a series of bailouts by the European Union and European Central Bank. What did European governments do about the crisis? The first thing governments did was a series of bailouts for Europe's troubled economies. Greece has received some bailouts since the start of the crisis. Ireland and Portugal also received bailouts. The Eurozone member states also created the European Financial Stability Facility to provide emergency leading to countries in financial difficulty. The European Central Bank announced a plan to purchase government bonds if necessary. In addition, while smaller countries such as Greece are small enough to be rescued, Italy and Spain are too big to be saved. What were the political issues involved? In the affected nations, the push toward austerity led to public protests in Greece and Spain and in the removal of the party in power in Italy and Portugal. On the nation level, the crisis led to tensions between the fiscally sound countries, such as Germany, and the higher-debt countries such as Greece. Is fiscal austerity the answer? Not necessarily. Germany's push for austerity was problematic in that reduced government spending can lead to slower growth. In turn, this made it more difficult for the high-debt nations to dig themselves out. This measures led to massive public protests.