Literature

Thomas Markelon

11/15/2012

Current Events Paper

In the most general terms the Euro crisis is a story of overspending in combination with poor fiscal policies, which led to unsustainable sovereign debt levels in many Euro countries. The crisis began to appear in 2008 during the global economic slowdown as cracks in government’s fiscal situation were able to be seen due to the interconnectedness of the worlds financial system. In particular do to the decrease in growth from the slowdown, Greece was forced to announce its debt was much larger than originally stated(put how much more with quote). Because of the unsuspected amount of debt, investors started demanding higher yields on the money they loaned Greece. As the interests rates rose making it more expensive to service the current debt investors got even more nervous reacting by selling more bonds as well as buying less creating a cycle of higher and higher rates. Eventually the EU and ECB had to step in as a backstop with bailout funds leading investors to start bidding up yields on many other European countries in anticipation of similar circumstances “”.

Some countries such as Germany actually had real growth and a robust economy which allowed the market to keep their yields at healthy levels. This however didn’t hide the fact that they stilled shared the same currency as Greece and the other troublesome economies. As a result of Germany being in a strong financial position much of the effort to fund a solution is ultimately in the hands of the Germans, which has created a lot of controversy as to how they should proceed. Since the beginning of the crisis, “German Chancellor Angela Merkel has, with French backing, advocated a response predicated primarily on spending cuts, tax increases, and structural reform in exchange for financial support”(). Some believe that instead of forcing weaker countries out of the Euro that Germany itself could leave the Euro and return to the Deutschemark.

If...