The European Sovereign Debt Crisis or commonly known as the Euro zone crisis, is an ongoing financial crisis in the euro area, consisting of 17 member states that have the Euro as their common currency or sole Legal Tender. Under this crisis, the members of euro zone find it difficult to repay their debts to the government, without the help of external third-party agents.
Cause of Euro Crisis
The debt crisis intensified because of many complex factors. The easy credit condition that prevailed between the years 2002 and 2008 encouraged a series of high-risk lending and borrowing practices. The first sign during the period of 2000-2007 was, when the global collection of fixed income securities showed an increase from 36 trillion in 2000 to 70 trillion in 2007. This showed the increase in savings, which became available for investment by a significant amount. In the light of this situation, both lenders and borrowers overlooked financial bubbles that kept generating through the world. As per the norm, in due time the bubbles burst due a decline in asset prices. Yet, the liabilities due to the global investors remained at full price. The situation turned grave as the interconnection in the global financial system says, if one nation turns a defaulter on its sovereign debt or goes into recession, which in turn puts the external private debt at risk, the banking system of the creditor nation will face losses . Along with the bankrupt defaulter nations, the creditor nations started incurring huge losses as well.
The European Central Bank or ECB, helped to mend the situation by lowering its interest rates and offering cheap loans of more than one trillion Euros, to keep up the flow of money between the European banks. Also on 6th September 2012, the ECB announced free unlimited support for all companies under Euro-zone.
Main Objectives of ECB
The main responsibility of the ECB is to make sure the price stability for the euro areas, as it is the main foundation of a proper functioning economy. It forms the basis for the much-needed justice of a fair society and the common welfare of all the Europeans. According to Walter Eucken, ” all efforts to set up a liberal order are futile unless there is a guarantee of a certain monetary stability .”
Current Economic Climate
The euro-economy collapsed by the end of 2011. The euro arena underwent an exorbitant recession but also expected to stage a complete recovery during the second half of the span. After that, the ECB saw a sign of stabilization in the current economy, which made economists and mentors trying hard to overcome the “Euro Crisis”.
The entire crisis affected the euro zone economy with that of various channels:
1) Banks started offering a small amount of loan to business houses and consumers.
2) New business homes had a cost cutting method by dismissing the employees and by paying less.
Exports are the worst hit sector, especially the ones that used Euro as the medium due to the slowdown of the European trading partners.
Current Economic Challenges to the Euro – Appropriate policies for the bank to conduct
Right from its foundation in the year 1999, the European Central Bank or ECB faced the challenges of the economic market wisely. It faced several problems that normally other banks do not have to. The major challenge of the bank lies in the fact that it tailors to twelve different economies. So, making a single economic policy becomes extremely difficult. The bank tries to improve the Euro economic area at the cost of a single nation. Currently, the GDP growth rate of Ireland is a high 4.5% while that of Italy is lagging behind with 1.2%. Therefore, the policy to stimulate growth in Italy involves a cut in the interest rate, while in Ireland the interest rates increased.
The main aim of the bank's monetary policy is maintaining stability in price. The ECB plans inflation rates that are below or near to 2%, in respect to the medium term. Inflation results in general increase in buyer price, which harmonizes across all the EU member states. This accounts for two things:
a. The advantage of price stability is real because it becomes difficult to keep up stable prices on a constant basis, where the economy is in continuous growth.
b. The monetary policy plays a significant role to support the price stability. It can affect the real activity for a shorter duration only.
By the end of 2012, the euro economic area saw a mild recession / negative growth. However, it witnesses a preliminary improvement in the second half of 2013. The recent economic policies undertaken by the ECB, along with other European leaders are acting as positive factors to overcome the euro crisis.