The European Sovereign Debt Crisis

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The European sovereign debt crisis, which made it difficult or impossible for some countries in the euro area to repay or re-finance their government debt without the assistance of third parties (Haidar, Jamal Ibrahim, 2012), had already badly hurt the economies in “PIIGS”, Portugal, Ireland, Italy, Greece and Spain. This financial contagion continues to spread throughout the euro area, and becomes a dangerous threat not only to European economy, but also to global economy. Although a commonly accepted view is that the hidden budget deficit in Greece is the beginning of the European sovereign debt crisis, the real causes of this economic crisis can be various. To reveal the whole event, a comprehensive review of the background is…show more content…
Specifically, they cannot devalue their currency to gain the export advantages as what they did before. In addition, without common fiscal policies, the countries tend to over rely on the adjustment of fiscal policies to solve their problems, leading bigger budget deficits. The terrible internal economies control. The countries in euro area, especially Portugal, Ireland, Italy, Greece, and Spain lost their control over the domestic financial situation. Specifically, Greece had long standing financial problems. The government spent largely on the social welfare, and had a great number of public servants who had extremely generous wage and pension benefits. Besides, the government had little control over its budget deficit, leading a long standing financial budget overrun. In Ireland, the estate bubble greatly destroyed government tax income and consumption power of public. Portugal’s lasting recruitment policies led to a great number of redundant public servants. The Italian economy suffered from the high unemployment rate and high tax rate, and had a slow growth in recent years. Trade imbalances. Appendix Table 2 shows that from 1999 to 2007, German unit labor costs fell by five percent, while these costs rose by 20 percent in Greece, 41 percent in Ireland, 19 percent in Italy, 22 percent in Portugal and 28 percent in Spain. These competitiveness gaps offered Germany a huge advantage in the trade, making it a better public
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