--%>
Assignment Help - homework help

The European debt crisis

Quetion:

Describe the present economic crisis situation in Europe.   Why has it been so difficult for the Europeans to find a solution to this problem?   Comment on what implications the crisis may have for the rest of the world if Europeans are not able to agree on a solution.

Answer:

The crisis which Europe is facing right now is primarily due to fiscal debt. Due to easy borrowing conditions during most part of the first decade of the 21st century, loans were issued to even subprime borrowers. Financial markets were leveraged, and investors were looking for avenues which yielded more returns than the risk free US treasury bonds. This led to investment in risky and high return yielding assets and markets. During the same time, Greece economy was doing well powered by a substantial fiscal deficit. However, as the global economic upsurge stalled a bit and the economy was hit hard because its shipping and tourism industries faced a downturn. This resulted in a fall in revenues, and there was a rise in the fiscal deficit. The country asked for help from IMF and EU and immediately after this S&P downgraded the debt rating of Greece to BB+. This led to an immediate fall in the value of Euro and the stock markets throughout the world. This led to a lack of confidence among the investors about the economies of the EU countries, and consequently, Ireland, Portugal, Italy and Spain also were hit by the crisis.

The main reason why this originated and persists is the high fiscal deficit which these countries persist with. This is further exacerbated by the lack of growth in these economies. Also, the workers in these economies are highly paid, and there are a range of subsidies assigned to masses. Lack of growth implies that there is not enough employment generation on one hand and an increase in fiscal deficit on the other. This situation is hard to sustain as most of the lenders to these countries are foreign investors who are looking for returns and flee away as soon as risk factors become high.

The financial markets today are more connected and interdependent upon each other than ever. Market runs on sentiments and expectations. Any fluctuation in one major market affects the markets worldwide. So, the European debt crisis has not been limited to Europe in its aftermaths. Investors turn bearish in case of any major setback and that affects their investment pattern overall, which in turn affects other economies/market. So a resolution to the European debt crisis is essential for the global economy, and the failure to reach a consensus on the solution is bad news for the entire world, and not just Europe.

   Related Questions in Macroeconomics

  • Q : From the heterodox approach From the

    From the heterodox approach, what options does the enterprise have to produce more output? What impact do these options have on its cost structure?

    		•
  • Q : Problem on slope of demand curve The

    The demand curve for DVD games is a straight line, therefore its slope: (1) Is constant, although price elasticity of demand drops/falls as output increases. (2) Price elasticity are both stable. (3) Is constant, although price elasticity of demand increases as the pr

    		•
  • Q : Control of Inflation Economists agree

    Economists agree that inflation beyond a moderate rate is undesirable as it can often prove disastrous and therefore, it must be kept under control. Economists agree also that an appropriate mix of fiscal and monetary policies can be helpful in controlling inflation.

    		•
  • Q : Why value of MPC is not greater than one

    Why the value of MPC is not greater than 1? Answer: This is because change in consumption can never be more than change in income.

    		•
  • Q : How prices allocate resources How

    How prices allocate resources?

    		•
  • Q : Problem on equivalent Consumer Surplus

    Tom reimburses $5.00 for a ticket to see a present hit movie. If Tom was willing to reimburse up to $7.00 for that ticket, his consumer surplus equals: (1) $5.00 (2) $2.00 (3) $7.00 (4) Tom does not receive any consumer surplus as he purchased the ticket.

  • Q : What is the difference between profit

    What is the difference between profit and producer surplus?

    		•
  • Q : Opportunity costs of consumption

    Individuals maximize the satisfaction whenever the marginal utilities of all goods are: (i) Precisely proportional to the consumer’s income. (ii) Maximized. (iii) Precisely proportional to the opportunity costs of consuming them. (iv) Equivalent

    		•
  • Q : Problem onto marginal tax rates A

    A prosperous person who made higher and higher incomes yearly would possibly benefit most from: (w) proportional tax system. (x) progressive tax system, much like the one in place today. (y) regressive tax system. (z) fixed percentage tax system.

    Q : Redistribution of Income through budget

    Redistribution of Income: Each and every economy strives to achieve a society, where inequality of income and wealth must be minimum. In order to attain this objective via government budget the government spends adequate money on social security schem

    		•