European sovereign debt crisis that is ongoing in Europe is seen to cause a major rumble in the international financial market. The crisis that has sparkled 2010/2011 is a revelation of how fiscal policies and monetary policies of the European Monetary Union are inadequate. The debt crisis has caused panic among the Greece, Portugal and Ireland economy. However, European Union and International Monetary Fund have moved to calm the rising uncertainties that characterize the economies of these countries in the major European economy. This paper will focus on the effects of European sovereign debt crisis and its impact on the international financial markets especially in Greece, Portugal and Ireland. It will also attempt to establish genesis of the crisis, European response to the crisis and alternative strategies to curb the crisis.
The agglomeration of Greece, Portuguese and Irish economic crisis is significantly the cause of troubled European economy. Greece, for example, is standing on a public debt which is also coupled with the rising global economic crisis. These three countries posses budget deficits that amount to 15.4%, 14.3%, and 9.3% for Greece, Ireland and Portugal respectively. This was established in the countries Gross Domestic Product for the year 2009. The European Union, following the debts owed by the aforementioned countries, tried to leverage Greece and Ireland from the financial crisis with Portugal also seeking a loan as part of curbing their budget deficits (Anthony, 2010; IMF, 2002). Greece has a relatively stable economy compared to Portugal and Ireland.
Crisis origin (the problem)
European countries have participated in borrowing of funds from the international communities. The borrowed funds are in turn used to curb the governments’ budgets and finances that have deteriorated over the years. From this, there has been a registered financial crisis due to overutilization of public expenditures to provide financial stability and stimulus in both international and European financial markets. European sovereign debt crisis is also asserted to have originated from easily accessible credit funds. This brought over reliance on credit funds to meet the domestic crisis (David, 2010).
European Union has also participated in a number of agreements which led to commercial and financial interdependence. This created vulnerability of European economic dependence resulting to subsequent effect in Europe when financial partners are worst hit by the crisis. The surges of crisis in Europe have propelled an establishment of various pacts to ensure strict budget discipline in order to erase monetary risks and encourage financial stability in European economy (David, 2010; Landon, 2010 and Krueger, 2002).
It is alleged that just before European Union succumbed to financial/debt crisis, Greece borrowed funds from international financial markets. This was meant to recover large deficits in their budget and accounts (IMF, 2002; Bradley, 2008). Greece crisis is mainly because of mismanagement of funds which is tied to evasion of tax, misappropriation and reporting of economic situation, and long spending deficit. Economists argue that a lot of money (largely borrowed) was spent in corruption and political interest of the governments (Bradley, 2008).
Greece current account deficit is believed to stand at 9% per year, with an estimation of 13.6% of its GDP in the year 2009. Other evaluation, however, puts its deficit to stand at 15.4% of GDP. Following this kind of crisis, Greece has showed some commitments to austerity program, meant for the avoidance of failures. Greece has sought for financial assistance from European Union and IMF in 2010 to help contain crisis (Penizza, 2009).
Global economic crisis and the subsequent European sovereign debt crisis was an insult to injuries that smacked financial problems in Portugal. Portugal fiscal adjustments have proved to be inadequate. Major economists argued that Portugal might require bailout as a prerequisite to adjustments to their volatile performance in financial markets (Marcus, 2010; Roggof, 1999; European central bank, 2010). Fiscal adjustments were also met by political opposition making the Portugal government get a major blow to the rising deficits in public budgets and accounts. These difficulties saw markets responding by cutting edge of credit rating to near junk status by the year 2011.
The crisis led to Portuguese request for loan from the European Union. These were rescue plans to the rising global economic crisis in financial markets. Portugal later became part of the league in European sovereign debt crisis; however, its debt level is below that of Greece and seemingly more stable than Ireland (Swartz, 2010).
For a period of time, Ireland economy has been consistent and stable in European financial markets. It has registered successful financial services in both industries and property markets. Industry became part of Ireland driving the economy, a result of which became over reliance on the industrial sector. With the introduction of sovereign debt crisis and global financial crisis, there was a massive deflation on domestic assets, household economy, and financial stability of both banks and governments (Krueger, 2002).
Ireland also suffered a major blow on its financial economy when it became the first country to fall into recession. Recession of Irish republic was first witnessed in early 2008 that caused a decrement in its output by 10%. This was coupled by the high rate of unemployment that increased by 4% to 13% between the year 2007 and 2010. The worst hit was witnessed in 2009 with a budget deficit of about 14% of the country’s GDP. Government of Ireland did not, however, sleep on the job (IMF, 2010; Buiter, 2010; Honnahan, 2010). They moved swiftly to implement measures that were mandated to contain the deficit to about 12% in 2010. Like Portugal and Greece, the government of Ireland also sought assistance from the financial markets such as IMF and EU. Bailout was granted to Ireland to restructure their budget to a four year plan that was aimed at cutting costs of expenditures and taxes. This budget was also meant to reduce the rates of unemployment and instead attain the benefits.
Responses to European sovereign debt crisis
The debt crisis that engulfed European in 2010 to 2011 was an indication of onset of problems to member nations. The focus of solving the crisis shaped to nation’s own economic crisis. It was also evident that the shift of focus created economic crisis that worsened the preexisting sovereign debt crisis. The escalating problem appeared difficult to contain owing to the fact that Europe has a consignment of various diversities (IMF 2002; Bradley, 2008; European Central Bank, 2010).
European ministers made the first attempt of aiding crisis by enacting $147 billion as a rescue package for Greece in 2010. The funds were largely to contain Greece financial defaults and to prevent of crisis to other countries. The European ministers gave out the funds to Greece with sets of preconditions for the loan. In a move, to reiterate their commitment, the government of Greece agreed to implement austerity measures to GDP amounting to 13% (IMF, 2010).
There was also creation of European financial stability (EFSF). The mandate of the facility was to prevent the widespread of the already experienced crisis. It was also charged to offer assistance to its member nations ensures financial sustainability. The European Union has also committed itself to the structural reforms that included maintaining fiscal discipline, effective and permanent crisis resolution program. The key premise of actions projected by the policy makers was certainly to prevent future financial crises, improve long term growth and sustainability of the finances in Europe. Financial market that is shaken by crises is a consumer trust detriment. The responsibility of various policies is to ensure that there is a constant demand, consumer confidence, subsidized costs, and minimal impact of economic downturn to the most vulnerable (Marcus, 2010; David, 2010; Krueger, 2002).
Strategies to crisis management
Responses have been initiated by the European Union and international monetary fund to contain the situation. However, there are unique and different perspectives that the responses cannot be effective enough to prevent situations witnessed in Greece, Portugal and Ireland. From this argument, there are other alternative solutions to counteract debt issues in these countries. These issues include restructuring of debt, implementation of innovative fiscal strategy, adopting foreign investment and stimulus to improve economic standing, and subsequent exit from broader European monetary union.
Debt restructuring is significant option to contain the financial default in European nation. Ruling out debt restructuring can cause a major crisis in financial markets, both in the international scene and European Union. Combination of austerity measures and debt restructuring has proved to be efficient in Greece (Honnahan, 2010).
Fiscal strategies that include austerity measures if implemented can be efficient in cutting governments debts. Implementation of an innovative fiscal strategy will be a boost of confidence in the European economy. Such programs will ensure that there are limits to the benefits by the poor, increased retirement age, and overall reduction in the public payrolls. Readjustment by the aforementioned countries to fiscal austerity will improve their economy.
Interdependence in terms of financial support from economically dominant nations can also be a solution to the looming sovereign debt crisis. Countries like china have staged their willingness to support Greece to improve its economy by giving $5 billion to the shipping industry. They also reiterated their support in investing in Greece bonds as soon as they are released to the markets. These interests from economically dominant nations can be a relaxation to recovery of crisis experienced in the Europe. Making an exit from the European monetary union can be another option towards finding a solution to the debt crisis. Countries that drag behind European economy can pullout. This will lessen the burden on those who are committed to economic adjustments. This would facilitate the committed countries to exercise monetary policies effectively. This will also enable the countries to devaluate their currencies, ensure discipline in fiscal austerity measures and stimulate their economic package through price competitive exports (Bradley, 2008).
Implications on international financial markets
European sovereign debt crisis is a major cause of uncertainties to the international financial markets or economy. The globe currently experience economic downturn and sovereign debt crisis might be untimely to the already existing severe economic consequences. The uncertainties have raised questions on the future of international financial markets with likely slowing down of most countries economic recovery. Similar debt crisis is also questioned whether it is likely to rupture in economically dominant countries like china, Japan, US, and Germany among others. The future of European Union and efficacy of its response to the debt crisis is uncertain especially its currency to the international financial markets. There are likely circumstances of unsystematic flows of European currencies to the international markets. The overall implications turn to the credibility of European financial framework, its durability in the international market, and commitment of European nations to austerity measures and institutional changes to defend the currency (Landon, 2010).
The main problem with European Union might have been its largish swift to contain the situation when it occurs. The austerity measures to curb the debt crisis should be in place rather than being implemented when the situation is worse. Establishment of various options to cut deficits is necessary to prevent the profound consequences of political and social hiccups in future. European Union should not wait to set an eye on the crisis so as to develop measures to curtail situation, but should succeed in both long term and short term policies in addressing the challenges. Lessons from the previous crisis must not be ignored, since they are public ethos which is essential for progress to be made.