Causes of crisis

 1.       Global financial meltdown of 2008 which spread to the banking and financial sector making it difficult for some of them to finance government bonds and forcing banks to insist on maturity proceeds.

2.       Collapse of tourism in some of these countries as a result of squeezing of financial markets in the aftermath of global financial meltdown. This has affected Greece much more than others. 

3.       High welfare payments doled out by some of these countries in the form of retirement benefits, old age pension, social welfare programmes and such other facilities which have dented government finances.

4.       Europe’s problems are fundamentally a question of which governments have taken steps to become competitive and which have not. Greece, Portugal and Ireland had progressively lost competitiveness vis-à-vis their main trading partners in the Suro area. Germany is an example of how big dividends of reforms can be it structural adjustment is made a strategic priority and implemented with patience. Thus, failure to carry out structural Reforms and privatization has been an important factor. 

5.       Debt- ridden countries have failed to strike a balance between cutting deficit and promoting growth. Economic risks have been aggravated by deterioration in confidence and a growing sense that policy makers do not have the conviction or are simply not willing to take decisions that are needed. There is a mismatch of fiscal and monetary policy in the sense that there is fiscal tightening along with monetary tightening. Ideally, there should have been monetary loosening as done by Bank of England and the Fed in US. What European central Bank has done is monetary tightening by raising rates twice during 2011.

6.       Monetary Union itself is also responsible as debt-ridden countries cannot take any independent step with respect to Euro, like devaluation or increasing/ decreasing money supply and interest rates.

7.       Market- driven refinancing in these countries implies much of the dept is also held by private investors and banks. This in sharp contrast to India’s Sovereign debt which his largely held by public sector banks and financial institutions. Private investors have lower risk taking capacity.

Some global experts feel that the risk of recession far outweighs the risk of inflation in these countries. As such, a loose monetary policy can help, thought it may cause some inflationary pressures. Budget cutting in debt-ridden Europe has been coupled with reluctance by the European Central Bank to stimulate growth by monetary easing like the Fed has done in the US. Instead the ECB has raised interest rates twice in 2011 to contain inflation. This has sucked hundreds of billions of dollars out of the European economy that may be edging towards recession. This approach has no doubt been successful line helping to keep debt problems of Greece from spreading to Europe’s larger economies. But the one- size- fits- all approach in Europe may ignore the tradeoff between government austerity and growth.

Consequences of Eurozone debt crisis for the zone itself could be as follows:

1.       It could kill weak banks.

2.       Monetary union may be in danger.

3.       Fate of Euro as a currency hangs in balance

4.       Along with US debt problems, it could hasten double dip recession.

Some of the important structural measures to address the crisis could be a big push to supply side reforms from freeing trade to slashing red-tapism and getting rid of excessive regulation, better coordination of fiscal and monetary policies, and well designed privatization scheme.