Putting The Euro Debt Crisis in Perspective

– Ahmed S. Minhas, staff

For many months now, Europe has been facing troubling financial times. With the bailout of Iceland in 2008, and Greece in 2010, it has put pressure on the European Union and its finances to balance the books. More recently, however, Italy is in danger of a bailout sponsored by the European Union.

For the European Union it seems, the bailouts and financial crisis are getting worse each year. Many investors and economists believe these are the effects of the 2008 recession and the insurmountable debt of the United States of America.

The most significant factor causing the European debt crisis has been Greece’s surmounting debt. Although it was recognized in 2010 that Greece needed an emergency bailout package, it wasn’t until May 2011 that austerity measures were proposed. A 110 billion Euro loan package was also agreed on, unfortunately for Greece, it came with a hefty 5% interest rate.

The Greek bailout was later followed by yet another bailout package for Ireland. In May of 2011, a bailout package was decided for Portugal. The totality of these three bailout packages provided by a collective of all the European Union nations was 273 billion Euros.

Over the years, Italy has piled up a high debt more than equal to its annual Gross Domestic Product. At the same time, Italy’s economic growth has slowed down and has led investors to believe that Italy is a risky asset to invest in. Former Italian Prime Minister Silvio Berlusconi for the most part ignored Italy’s impending financial crisis. This caused a sharp rise in borrowing costs for Italy bringing them to an all-time high of 7.5% in November 2011.

The rising borrowing cost in Italy has caused great concern for the rest of the European Union. This concern has given rise to fears that Italy may have to drop the Euro (essentially be kicked out of the EU) and return to its original currency, the Lira. As Berlusconi stepped down, the new interim government is led by Mario Monti. Monti and his interim government have promised strict austerity measures to trim the Italian debt.

To deal with growing financial crisis, the European Union collectively agreed to create the European Financial Stability Facility. The EFSF is aimed at creating financial stability in Europe via bailing out any of the 27 member states when required.

In order to fund the bailouts, the EFSF will sell bonds and use the money from them to offer loans up to a maximum of 440 billion Euros to those member states in need. A further 250 billion Euros will be funded by the International Monetary Fund.

The European Financial Stability Facility is a temporary program that will be replaced by the planned European Stability Mechanism in 2013.

In order to improve the financial stability of the European Union, the European Central Bank and its system of European banks will start buying government debt worth 183 billion Euros. This and the reactivation of the dollar-Euro swap lines with the Federal Reserve are aimed at improving liquidity and reducing volatility in European financial markets.

The threat of the double dip recession from the past few years has not yet faded away. Many economists from around the world have explained that the European debt crisis has corresponded to its slow economic growth. The European states at concern (Greece, Italy), have not shown significant economic growth for close to a decade.

The European Union is suffering a catastrophic debt crisis and has fortunately begun to mobilise a suitable response to offset its potential financial volatility. However, the handling of national debt by the European Union’s individual member states is troubling. As evidenced by Greece’s high cost bailouts and former Italian Prime Minister Silvio Berlusconi’s resignation.

The ones who are really suffering from this recession are the European citizens. Great austerity measures and rapid reforms including increasing the retirement age, and budget cuts on education and healthcare are sure to hit hard.

Italy’s austerity measures are aimed at saving 124 billion Euros by raising taxes, increasing healthcare fees, and adopting cuts on family tax benefits and pensions. Italy’s budget cuts on education have already sparked protests by students and other demonstrators. Over 7000 students marched and stood against riot police in Milan last week.

Undoubtedly, this financial crisis is going to hit Canada, if it hasn’t already.

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