This paper analyzes the key factors driving the European Union's euro currency crisis, focusing on sovereign debt risks in Greece, Portugal, Ireland, Spain, and Italy, and their effects on European banking confidence. It explores both long-term structural weaknesses — including disagreements among EU member states over burden-sharing and the ECB's reluctance to intervene — and the short-term policy failures of 2011, such as overzealous competition enforcement and the shortcomings of the Economic and Monetary Union. The paper concludes with GDP projections for the EU and the eurozone for 2014, highlighting recovery leaders such as Latvia, Lithuania, and Estonia alongside continued challenges in Cyprus and Slovenia.
One of the major long-term issues that have damaged the euro is the fear about whether the governments in Greece, Portugal, Ireland, Spain, and Italy will honor their $4.2 trillion in debts (Burgen, 2012). Failure to honor these debts has far-reaching consequences for European banks, which hold these countries' debt. Struggling banks are likely to suffer losses in investor confidence and access to credit. Countries that depend on credit from these banks have responded with austerity measures that have been synonymous with recession (The Economist, 2011). This has further deepened fears that governments would be less likely to honor their debts, which in turn has further weakened the banks.
In spite of the fact that the eurozone has the capacity to support its banks and governments — and has the backing of the European Central Bank (ECB) — it has failed to put forward a convincing euro rescue plan (The Economist, 2011). Another issue is that member states of the EU do not clearly understand what the euro crisis is fundamentally about. Member states are also at odds regarding what each country must contribute toward solving it. Defending the euro will remain elusive as long as member states cannot settle these disagreements (The Economist, 2011).
The link between the euro and individual nation states such as Germany can best be described as fraught. Member states of the EU have been at loggerheads over the direction of eurozone policy, and this lack of cohesion has compounded the structural vulnerabilities already present in the currency union (The Economist, 2011). The Economic and Monetary Union (EMU), whose core mandate included banishing competitive devaluations and binding a unified Germany into the EU while paving the way for political union in Europe, failed to deliver fully on those promises. These unresolved structural tensions have left the eurozone ill-equipped to respond decisively to sovereign debt pressures.
"Policy failures and EMU shortcomings worsen the crisis"
"Mixed GDP projections across EU and eurozone members"
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