1. Money

The Eurozone Crisis

Causes and Solutions to the Eurozone Debt Crisis

By

The eurozone crisis originated with investor concerns about sovereign debt levels, which led to higher bond yields and unsustainable deficits. While a 750 billion euro rescue package was setup in response, the crisis continues to persist due in large part to political disagreements and the lack of a cohesive plan among member states to address the problem.

Eurozone Crisis Timeline & Causes

Many experts agree that the eurozone crisis began in late 2009, when Greece admitted that its debts had reached 300 billion euros, which represented approximately 113% of its gross domestic product (GDP). Meanwhile, the European Union (EU) had already warned several countries about their debt levels, which were supposed to be capped at 60% of GDP.

In early 2010, the EU noted several irregularities in Greece's accounting systems, which led to upward revisions of its budget deficits. Ratings agencies promptly downgraded the country's debt, which led to concern among other troubled countries in the eurozone, including Portugal, Ireland, Italy and Spain, whom also had lofty levels of sovereign debt.

The negative sentiment led investors to demand higher yields on sovereign bonds, which of course exacerbated the problem by making borrowing costs even higher. Higher yields also led to lower bond prices, which meant larger countries and many eurozone banks holding sovereign debt in troubled countries began to suffer, requiring their own set of solutions.

After a modest bailout by the International Monetary Fund, eurozone leaders agreed upon a 750 billion euro rescue package and established the European Financial Stability Facility (EFSF) in May of 2010. Eventually, this fund was increased to about 1 trillion euros in February of 2012, while several other measures were also implemented to stem the crisis.

Countries receiving bailout funds from this facility were required to undergo harsh austerity measures designed to bring their budget deficits and government debt levels under control. Ultimately, this led to popular protests throughout 2010, 2011 and 2012 that culminated in the election of antibailout socialist leaders in France and likely Greece.

Potential Eurozone Crisis Solutions

The failure to resolve the eurozone crisis has been largely attributed to a lack of political consensus on the measures that need to be taken. Rich countries like Germany have insisted on austerity measures designed to bring down debt levels, while the poorer countries facing the problems complain that austerity is only hindering economic growth prospects further.

Perhaps the most popular solution proposed has been the so-called Eurobond, which would be jointly underwritten by all eurozone member states. These bonds would presumably trade with a low yield and enable countries to more efficiency finance their way out of trouble and eliminate the need for additional expensive bailouts.

The problem with this solution is mostly that of complacency. Some experts believe that access to low interest debt financing will eliminate the need for countries to undergo austerity and only push back an inevitable day of reckoning. Meanwhile, countries like Germany could face the brunt of the financial burden in the event of any Eurobond defaults or problems.

With disagreements between rich and poor countries in the region, there is a risk that nothing will be accomplished and the situation will only worsen. In the end, there may not be any easy answer to the eurozone crisis, but financial markets continue monitoring the situation in hopes that a solution amicable to all countries arises.

  1. About.com
  2. Money
  3. International Investing
  4. Getting Started
  5. The Eurozone Crisis: Causes and Potential Solutions

©2014 About.com. All rights reserved.