European debt crisis is a debt crisis that has affected European Union (EU). Many European zone members could not repay government debt that had severe impact on their economies. These states could not prevent macroeconomic imbalances that caused exceeding debt crisis.
Since, European zone stopped foreign investment in the countries, it was difficult for the member states economies to survive due to excessive dependent on foreign countries. Debt-to-equity ratio had also increased which caused intensive borrowing and spending. France and Germany were involved spent more than the limit.
Member states of the Eurozone adopted similar monetary policies and currencies. However, the fiscal policies of each country were different, which encouraged country like Greece to borrow and spend more.
International trade imbalances led to economic problems. The Great Recession of 2008-2012 worsened the fiscal policies that were adopted to control government expenses. Private debt burdened the existing debt. European Central Bank chose that interest rates in Germany were high, whereas interest rate was lower in Southern eurozone. Germany would lend to Southern states. This gave rise to wages and prices and exports had become less competitive. They had to boost their spending capacity to protect people who were unemployed and needed support. They borrowed more and spent more than what they borrowed.
European governance did not structure the policies that were initiated to control growing debts. Fiscal policies were not implemented properly by the government. In Greece, the governments could not handle the situation due to lack of support from the citizens.
Due to rising unemployment, consumers had to reduce their spending. Unemployment increased because of austerity measures like budget cuts, lower spending. These measures did not work in the favor of protecting the nation from expanding debts.
Foreign investments reduced with ascending debts. Investing in a country that is stuck with a pile of debt was not profitable. Lower investments did not encourage job opportunities and growth of the economy
High unemployment, lower wages, shutting down of businesses was the result of the debt crisis. Lack of permanent jobs encouraged people to move to other countries. Adopted policies had reverse effect on the economies. Higher exports and lower imports created even higher debts.
Greece has the highest debts compared to other states. Greek debt crisis originated from heavy spending and borrowing that escalated its overall debt. Improper structure of taxation caused loss of taxes. The debt piled up and Greece was not in a position to pay back all its debt.
This crisis arrived in late 2009 because of Greek governments disclosure that it has higher budget deficits. Greece was helped by European countries by support them with measures to control the deficits like European Financial Stability Facility (EFSF). Greece has repaid 41.6 billion euros as of 2019.
European Debt crisis had profound impact on countries despite stringent measures were taken to stabilize economies. While European nations were gradually recovering from this crisis, coronavirus has concerned these nations again. Effect of Covid-19 is affecting economies and imperative measures are being taken to prevent forthcoming crisis.