--%>
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 : Explain growth accounting. Economic

    Economic growth is measured by the rate of increase in national output, GDP. The output depends on inputs -labour, capital technology etc. the theories of economic growth bring out how and to what extent each input or factor contributes to the g

    		•
  • Q : Explain Tax rate increase. A change in

    A change in tax rate changes the IS equation, LM equation remaining the same. Let same, let us suppose that the government raises the tax rate from 20 percent to 25 percent<

    		•
  • Q : Problem on superior or luxury goods The

    The Income effects will be most strongly positive for: (1) Normal goods. (2) Necessities. (3) Superior or luxury goods. (4) Substitutes and much negative for the complements. Find out the right answer from the above options.

    		•
  • Q : About macroeconomics Do you think that

    Do you think that macroeconomic policy should be designed to achieve a measured unemployment rate of zero? Why or why not should this be the case?

    		•
  • Q : IS-KM Model with classical supply

    discuss with the help of IS-LM model why money has no effect on output in classical supply case

    		•
  • 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 : What is substitutes Substitutes : The

    Substitutes: The two goods for which a rise in the price of one good leads to a rise in the demand for another.

    		•
  • Q : Purpose of Balance of Payment Meaning:

    Meaning: - as mentioned above, the balance of payments is a periodic accounting of international economic transactions. Each country having regular economic transactions with other countries prepares periodically the final accounts of their foreign receipts and paymen

    		•
  • Q : Consequence of investment in economy

    When in an economy intended investment is more than intended savings, then what is the consequence of it on the national income? Answer: When I > S, the level of

    		•
  • Q : Define Quantity of a good Quantity of a

    Quantity of a good: The quantity of a good which buyers demand is found out by the price of the good, income, the prices of associated goods, expectations, tastes, and the number of buyers.

    		•