The crisis in the public finances of the Euro Zone countries on the example of the problems of Greece, Ireland, Portugal and Spain

Inhalt

1. Introduction

2. Monetary policy in the European Union

3. European sovereign debt crisis
3.1. Definition
3.2. Causes

4. Different approaches and political options in predestined European countries
4.1. Greece
4.1.1. Causes
4.1.2. Approaches and political options
4.1.2.1. Countermeasures taken by the Greek government
4.1.2.2. Rescue packages provided by the EU and IMF
4.2. Spain
4.2.1. Causes
4.2.2. Reaction of the government and the population
4.2.3. Rescue package of the European Union
4.3. Portugal
4.3.1. Causes
4.3.2. Helpof the European Union
4.3.3. Measures of the Portuguese government
4.4. Ireland
4.4.1. Causes
4.4.2. Helpof the European Union
4.4.3. Measures ofthe Irish government

5. Conclusion

6. Bibliography

1. Introduction

The European Union (EU) consists of 27 European countries. The political System is based on two treaties which are as follows: Treaty on European Union (TEU) and Treaty on the Functioning (TFEU) of the European Union. Furthermore they constitute the Economic and Monetary Union (EMU) in which 17 states belong to the euro zone. Members of the euro zone are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.^[1] The Economic and Monetary Union is an agreement, which tries to connect the monetary and economic policy measures in a three stage process tighter since the 1. July 1990.^[2] Chief aims are the Coordination of fiscal policies, coordination of economic policy-making between Member States, an independent monetary policy run by the European Central Bank (ECB) ,notably through limits on government debt and deficit and the single currency and the euro area."^[3]

Foundation for the participation on the Economic and Monetary Union are the Convergence criteria, those are in the Maastricht treaty. The Maastricht treaty was signed on 7 February 1992 and contains the main points like:

1. Harmonised Index of Consumer Prices (HICP), an indicator for price stability and inflation. The rate should be no more than 1.5% above previous year's rate for the 3 EU countries with the lowest.
2. participation on the exchange rate mechanism of the European monetary system,
3. Government budget deficit, must be below than 3% of gross domestic product (GDP),
4. long- term interest rates, which shall be maximum 2.0%
5. National debt should not exceed 60 % of GDP.^[4]

The Economic and Monetary Union agreement was implemented by the 27 European states in a different dimension. The other European states are obliged, after achieve the convergence criteria, to implement the Euro. Exceptions are only the two states Denmark and the United Kingdom have available an opt-outs in the Maastricht Treaty. "Sweden gained a defacto opt-out by using a legal loophole."^[5]

2. Monetary policy in the European Union

Since l.January 1999 in the European union are used the euro as a bank currency and since l.January 2002 in the euro zone also as hard cash, which is be tantamount to use coins and banknotes.

Abbildung in dieser Leseprobe nicht enthalten

2.1. Figure

Member States with an opt-out^[6]

The European central bank (ECB) is responsible for the monetary policy and pursued the aims of the Maastricht treaty. Combined with the national central banks of the European Union they constitute the European System of Central Banks (ESCB). Important is too separate the ESCB from the Eurosystem. During the ESCB enfolded all the 27 European countries, belong to the Eurosystem next to the European Central bank only the national central banks of the countries which adopted the Euro as a currency in 2002. The Eurosystem exist as long as not all the countries established the Euro. The main aims are different to the European System of Central Banks. This shows very plainly that the primary objective of the ESCB and Eurosystem is the same: price stability, but the secondary objectives are miscellaneous. So are the secondary aims by the ESCB: "to improve monetary and financial cooperation between the Eurosystem and the member states outside the eurozone"^[7] and from the Eurosystem: "financial stability and financial integration. The mission statement of the Eurosystem says that the European central bank and the national central banks jointly contribute to achieving the objectives."^[8]

Since 27 September 2012 the European Union established the European Stability Mechanism (ESM) which is located in Luxemburg. It is a financial institution which replaces the two existing temporary EU programmes: the European Financial Stabilization Mechanism (EFSM) and the European Financial Stability Facility (EFSF). The aims of ESM are to support financial insolvent member states of the Eurozone and control the observance of the economic- political restriction.^[9]

3.1. Definition

"A period oftime in which several European countries faced the collapse offinancial institutions, high government debt and rapidly rising bond yield spreads in government securities."^[10]

Abbildung in dieser Leseprobe nicht enthalten^[11]

3.2. Causes

The financial policy of the European Union headed to the right tendency till the year 2009where the European sovereign debt crisis broke out. The employment improved, the increase was solid and the deficits were under 3 % in the countries. Spain and Ireland recorded in the years 2007 and 2008 even budget surpluses. Only Greece and Portuguese had some deficits. The reasons for the crisis were a combination of complex factors, including the global financial crisis 2008, real- estate bubbles for example on the construction sector in Spain, international trade imbalances and many more. In the most of the countries they imposed economic stimulus package, which were financed by credits. In the chart 3.1. you can see how the budget balance increase and also that as an effect the

Chart 3.1. The debt level and the budget balance of selected countries^[12]

4. Different approaches and political options in predestined European countries

4.1. Greece

4.1.1. Causes

There are many different factors which have led to the Greek government-debt crisis. One crucial role are the mistakes in the Greek statistics. Only in connection with this wrong statistics, Greek could join to the monetary union because usually it is necessary to fulfill the convergence criteria. Since entry into the European Union, Greek transcends without any interruptions the annual Government budget deficit of 3.0% of the gross domestic product. Furthermore is the amendment of the data from 2009 another example. The circumstances were that Greece indicate here gross domestic product with 3.0% but after the change of government, the new premier minister Giorgos Papandreou corrected the date of 12.7%. Although Greece were relative slightly affected by the financial crises, it came to the described situation in the year 2009. As a reaction some rating agencies reduce the creditworthiness of Greece so that the interests for Greek government bonds rose to pre­Euro- level. This fact makes the raising of a credit for new and exist debts almost impossible.

[...]

^[1] CRP. Called on 25.11 2012 of http://www.crp-infotec.de/02euro/finanzen/eurozone.html

^[2] Wikipedia. Called on 25.11.2012 of

http://de.wikipedia.org/wiki/Europ%C3%A4ische Wirtschafts- und W%C3%A4hrungsunion

^[3] Economic and Financial Affairs. Called on 25.11.2012 of http://ec.europa.eu/economy finance/euro/emu/index en.htm

^[4] Eurounion. Called on 01.12.12 of http://www.eurunion.org/News/eunewsletters/EUFocus/2009/EUFocus-EMU- Jan2009.pdf

^[45Wikipedia. Called on 26.11 2012 of http://en.wikipedia.org/wiki/Eurozone

^[6] Economic and Financial Affairs. Called on 26.11.2012 of http://ec.europa.eu/economy finance/euro/countries/index en.htm

^[7] Wikipedia. Called on 26.11 2012 of http://en.wikipedia.org/wiki/Eurosvstem

^[8] Wikipedia. Called on 26.11 2012 of http://en.wikipedia.org/wiki/Eurosystem

^[9] ESM. Called on 30.11.12 of http://www.esm.europa.eu/about/index.htm

^[10] Investopedia. Called on 26.11.2012 http://www.investopedia.com/terms/e/european-sovereien-debt- crisis.asp#axzz2DM9vDspK

^[11] Wikipedia. Called on 26.11 2012 of http://en.wikipedia.org/wiki/European sovereign-debt crisis

^[12] Gemeinschaftsdiagnose (2011): Aufschwung setzt sich fort - Europäische Schuldenkrise noch ungelöst, ifo Schnelldienst 8/2011, 64.Jahrgang, S. 3-63.