The euro zone is an economic and monetary union of 17 European Union member states that have adopted the euro (€) as their common currency. The euro zone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
Monetary policy of the zone is the responsibility of the European Central Bank (ECB) which is governed by a president and a board of the heads of national central banks. The principal task of the ECB is to keep inflation under control.
Over the past few months, the European debt crisis has become more prominent and has been dominating headlines as the region’s sovereign debt issues continue to cause concern for the EU and potentially other global economies. The debt crisis basically came about because several Euro zone countries have lost control of their finances since the global recession, borrowing and spending more than they could realistically afford. The crisis was triggered by the worldwide financial collapse that began in 2008 and has been exacerbated by poor financial management.
The problem originated in Greece when it was realised that Greece’s deficit was twice as high as originally thought (12.7 per cent of GDP). It has since spread to other countries such as Spain, Ireland, and Portugal. Investors have since become less confident about Greece's ability to repay them and they demanded Greece pay higher interest rates on their bonds. This had a spiral effect as the more Greece had to pay bondholders in interest, the more it had to borrow, which in turn drove up interest rates even more. Greece's debt problems led investors who owned bonds issued by other peripheral Euro zone countries to lose confidence, especially because banks in France, Germany and the UK owned over $56bn worth of Greek government bonds. As a result of the crisis, other European countries have had to bail Greece out. This has cost billions of Euros. Greece was the first country to accept a bailout in May 2010, followed by Ireland and Portugal. However, before these bailouts were approved, the Governments of these countries had to agree to adopt 'austerity measures' to show they were doing what they can to tackle their economic problems themselves. This has led to mass public protests in Greece, with many people demonstrating against more job losses and tax rises as a result. A major concern is that if Greece is unable to keep repaying what it owes to other countries, the country could effectively go bankrupt which would have flow on affects on other countries. The uncertainty surrounding the Euro debt crisis has caused havoc in major world financial markets. This can be reflected in the CBOE volatility index. The Chicago Board of Options Exchange (CBOE) gives a standardised estimate of the market's expectation of future volatility. The index spiked upwards in August to the highest level since the global financial crisis. Over the past few weeks it has become more subdued as EU leaders begin to work out a possible solution to the EU debt crisis. In recent weeks, it appears that the Euro zone has inched closer to a resolution of its crisis. A debt-wracked Italy has come under pressure to introduce new reforms to tackle their own levels of debt. If Italy, the EU zone’s third largest economy, were to default, the bailout fund would become rapidly depleted and ineffective. Options are being explored on ways to scale up the EU’s 440 billion Euro war chest in the case that a larger economy such as Italy or Spain are dragged into the debt mire. One way of doing this is providing insurance to investors so that their losses would be recovered in the event of a debt default. Another option would be to create a separate fund and entice international investors and institutions to match EU commitments, thereby increasing the amount of cash available for potential future bailouts. By using such financial inventiveness, leaders hope to leverage the fund up to as much as a trillion Euros, which they hope will be enough to reassure volatile financial markets. In order to address the crisis, Greece's debt burden needs to be reduced so that the country can eventually stand on its own, banks need to raise more money so they can ride out the financial storm, and show that their European bailout fund is big and nimble enough to prevent larger economies from being dragged into the crisis. This criteria was met in the debt crisis plan which was unveiled in late October. A “Comprehensive” Debt Crisis Plan On the 27th October, 2011, the Euro zone leaders announced a “comprehensive and solid” response to the European debt crisis. The agreement has plans to: Begin negotiations on a nominal 50 per cent cut in bond investments to reduce Greece's debt burden by €100 billion. This would have the affect of cutting Greece’s debts from 160 per cent of GDP to 120 per cent of GDP by 2020. As well as the deal on deeper private sector participation in Greece, Euro zone leaders also agreed to scale up the European Financial Stability Facility (EFSF). The EFSF is Europe’s €440 billion bailout fund which was set up last year. The fund has already been used to provide help to other heavily in debt countries such as Portugal, Ireland and Greece, leaving around €290 billion available. An estimated €250 billion of that will be leveraged four to five times, producing a headline figure of around €1trillion, which will be deployed in a variety of ways. The EFSF will be boosted via both risk insurance and a special vehicle that will buy bonds. Further resources would come from co-operation with the IMF and sovereign wealth funds, including China. The fund would be tasked with ensuring financial stability in the Euro zone. These announcements have provided a degree of relief for international economies and share markets as it appears a tourniquet has been wrapped around the crisis for the time being. A recent announcement by the Prime Minister for Greece (George Papandreou) could undo a lot of the positive outcomes that came out of the debt crisis plan. The Prime Minister has called a referendum on accepting a second bailout plan. This move has renewed fears that Greece could default on its debt and that the Euro zone government debt crisis could deepen. This has shown that the debt crisis plan is only a movement in the right direction in trying to solve the crisis and that it is far from being laid to rest.
Monetary policy of the zone is the responsibility of the European Central Bank (ECB) which is governed by a president and a board of the heads of national central banks. The principal task of the ECB is to keep inflation under control.
Over the past few months, the European debt crisis has become more prominent and has been dominating headlines as the region’s sovereign debt issues continue to cause concern for the EU and potentially other global economies. The debt crisis basically came about because several Euro zone countries have lost control of their finances since the global recession, borrowing and spending more than they could realistically afford. The crisis was triggered by the worldwide financial collapse that began in 2008 and has been exacerbated by poor financial management.
The problem originated in Greece when it was realised that Greece’s deficit was twice as high as originally thought (12.7 per cent of GDP). It has since spread to other countries such as Spain, Ireland, and Portugal. Investors have since become less confident about Greece's ability to repay them and they demanded Greece pay higher interest rates on their bonds. This had a spiral effect as the more Greece had to pay bondholders in interest, the more it had to borrow, which in turn drove up interest rates even more. Greece's debt problems led investors who owned bonds issued by other peripheral Euro zone countries to lose confidence, especially because banks in France, Germany and the UK owned over $56bn worth of Greek government bonds. As a result of the crisis, other European countries have had to bail Greece out. This has cost billions of Euros. Greece was the first country to accept a bailout in May 2010, followed by Ireland and Portugal. However, before these bailouts were approved, the Governments of these countries had to agree to adopt 'austerity measures' to show they were doing what they can to tackle their economic problems themselves. This has led to mass public protests in Greece, with many people demonstrating against more job losses and tax rises as a result. A major concern is that if Greece is unable to keep repaying what it owes to other countries, the country could effectively go bankrupt which would have flow on affects on other countries. The uncertainty surrounding the Euro debt crisis has caused havoc in major world financial markets. This can be reflected in the CBOE volatility index. The Chicago Board of Options Exchange (CBOE) gives a standardised estimate of the market's expectation of future volatility. The index spiked upwards in August to the highest level since the global financial crisis. Over the past few weeks it has become more subdued as EU leaders begin to work out a possible solution to the EU debt crisis. In recent weeks, it appears that the Euro zone has inched closer to a resolution of its crisis. A debt-wracked Italy has come under pressure to introduce new reforms to tackle their own levels of debt. If Italy, the EU zone’s third largest economy, were to default, the bailout fund would become rapidly depleted and ineffective. Options are being explored on ways to scale up the EU’s 440 billion Euro war chest in the case that a larger economy such as Italy or Spain are dragged into the debt mire. One way of doing this is providing insurance to investors so that their losses would be recovered in the event of a debt default. Another option would be to create a separate fund and entice international investors and institutions to match EU commitments, thereby increasing the amount of cash available for potential future bailouts. By using such financial inventiveness, leaders hope to leverage the fund up to as much as a trillion Euros, which they hope will be enough to reassure volatile financial markets. In order to address the crisis, Greece's debt burden needs to be reduced so that the country can eventually stand on its own, banks need to raise more money so they can ride out the financial storm, and show that their European bailout fund is big and nimble enough to prevent larger economies from being dragged into the crisis. This criteria was met in the debt crisis plan which was unveiled in late October. A “Comprehensive” Debt Crisis Plan On the 27th October, 2011, the Euro zone leaders announced a “comprehensive and solid” response to the European debt crisis. The agreement has plans to: Begin negotiations on a nominal 50 per cent cut in bond investments to reduce Greece's debt burden by €100 billion. This would have the affect of cutting Greece’s debts from 160 per cent of GDP to 120 per cent of GDP by 2020. As well as the deal on deeper private sector participation in Greece, Euro zone leaders also agreed to scale up the European Financial Stability Facility (EFSF). The EFSF is Europe’s €440 billion bailout fund which was set up last year. The fund has already been used to provide help to other heavily in debt countries such as Portugal, Ireland and Greece, leaving around €290 billion available. An estimated €250 billion of that will be leveraged four to five times, producing a headline figure of around €1trillion, which will be deployed in a variety of ways. The EFSF will be boosted via both risk insurance and a special vehicle that will buy bonds. Further resources would come from co-operation with the IMF and sovereign wealth funds, including China. The fund would be tasked with ensuring financial stability in the Euro zone. These announcements have provided a degree of relief for international economies and share markets as it appears a tourniquet has been wrapped around the crisis for the time being. A recent announcement by the Prime Minister for Greece (George Papandreou) could undo a lot of the positive outcomes that came out of the debt crisis plan. The Prime Minister has called a referendum on accepting a second bailout plan. This move has renewed fears that Greece could default on its debt and that the Euro zone government debt crisis could deepen. This has shown that the debt crisis plan is only a movement in the right direction in trying to solve the crisis and that it is far from being laid to rest.
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