Euro Zone Crisis Essay

586 WordsMay 14, 20133 Pages
Euro zone crisis developed in 2009 and became rather tense in 2010. Originated from Greece, Portugal, Spain and Italy, the crisis has now spread and infects the whole European Union and even the whole world. “These adverse economic consequences of euro include sovereign debt crises; fragile condition of major European banks, large trade deficit and high level of unemployment.” (The Failure of the Euro) Lacking of clear response by European governments, the economic situation of Europe for the future is hardly optimistic. There are several reasons that result in the crisis. The main reason is that, the Euro is introduced as a single currency of European Union countries; thus all these countries are required to have same monetary policies and same basic interest rate. However, each country faces different economic structures and conditions. Some countries have rising unemployment rate whereas other countries experience rising in wages and government benefits. Therefore, the fixed interest rate could not work suitably to all these countries. In these EU countries, German has a large size of economy compare to others, so the monetary policy have to give a greater weight of conditions in German than to conditions in other countries. In the long-run, the economy in EU is quite imbalance, such as in Greek, Italy and Spain. They expectation of high inflation kept the interest rate relatively high, however the tough policy of the European Central Bank caused the interest rate to fall. Therefore, the governments and households in these countries increase their borrowing as a response to the low interest rate; this sharply increases the ratios of debt to GPD and the interest rate of sovereign debts in these countries. In this situation, the rising interest rate led countries especially Greece to the edge of insolvency. This problem also affected the relationship between

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