What is the eurozone crisis?
The European sovereign debt crisis is one that has made it nearly impossible for the economically weaker countries in the eurozone to refinance their debt without assistance. In the aftermath of the US sub-prime mortgage meltdown in 2008, European banks fled to what they saw as safe bonds from countries in Europes ostensibly solid monetary union. The European sovereign debt problems progress into the new subprime crisis is a result of governments borrowing beyond their means, regulators permitting banks to treat the bonds as risk-free, and investors failing to make a distinction between the bonds of troubled economies like Greece, Portugal and Italy and those issued by stronger ones like Germany and France.
How did the debt pile up?
When the European economic and monetary union became operational from January 1999, all the peripheral eurozone economies experienced windfall gains from the sharp reduction in bond yields and resultant cost of borrowing. Over a four-year period from 1995, bond yields more than halved and converged around 4 per cent across most eurozone economies. Governments and corporates piled up debt, especially by way of borrowings from banks in core area economies, as they splurged on this sudden access to cheaper capital, triggering resource mis-allocation and asset bubbles. The boom also led to a rise in wages and input prices, and a decline in relative economic competitiveness.
How far is the Europen Union structure responsible?
The crisis was in some ways inevitable given the impossibility of managing a monetary union without some form of fiscal union and a fully committed central bank.
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