The European sovereign debt crisis

Abstract

The Sovereign debt crisis occurring in the Euro zone countries has far reaching implications on not just the member countries but also on other world economies. The crisis has severely affected the countries of the Euro zone and efforts are currently taking place to save the Euro. The future of the Euro is uncertain and the response of the bigger countries like Germany and France is not adequate to boost confidence in the Euro zone. The crisis which began in Greece has brought out the issue of large sovereign debt of the member countries. The situation in the other member countries like Spain, Portugal, Ireland and Italy has also not been very good with high levels of debt and fiscal deficit. The crisis can severely impact investor confidence in the European region and also affect trade relations with other countries. Several measures are being pursued to address the problems posed by the crisis like going for austerity measures to cut the deficit. However the feasibility of the measures are a subject for concern provided the fact the countries are just recovering from a major recession and there is also an issue of trust regarding the commitment of the member countries towards resolving the problems. Various bailout schemes have also been suggested to save Greece and preventing the contagion from spreading to the other member countries like Spain and Portugal. Greece has already received two rounds of bailouts as part of a rescue package (€109 billion in July and €130 billion was announced on October 27th) to save the Euro zone. The crisis points to several interesting observations. One relates to the issue of managing the countries’ economies under a common monetary policy and multiple fiscal policies. It thus addresses the current institutional structures in Europe and the need for a common fiscal authority. It also raises questions about the feasibility of fiscal tightening and the various rescue packages to save the Euro. Another important factor that is particularly relevant to our country is its impact on emerging economies like India.