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2011 World News: Euro Debit Crisis

Future of Euro in Peril as Crisis Spreads

by Beth Rowen

euro

The European Central Bank in Frankfurt

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The European debt crisis, which began in 2009, reached a crisis point in 2011. Greece, Ireland, and Portugal received bailouts, and Italy and Spain—economies considered too large to bail out—teetered on the brink of default. Each of the countries was forced to impose strict austerity measures that were wildly unpopular with citizens and sparked large demonstrations. The measures likely stalled growth even further by increasing unemployment and cutting government spending.

Greece Leads in the Fall

Throughout the crisis, Germany, the euro zone's strongest economy, resisted footing the bill for the smaller economies, saying it shouldn't be held responsible for the profligacy of smaller nations. In late October, after protracted negotiations, the leaders of the euro zone agreed on a proposal to bring the debt crisis under control. The terms of the proposal included asking banks to take a 50% cut in the value of Greek debt and to raise new capital to protect them from future defaults, and increasing the euro-zone's bailout fund to $1.4 trillion.

Crisis Claims Leaders of Several Nations

By late fall, the debt crisis had claimed the governments of Greece, Italy, Ireland, and Spain. Many economists and European leaders called on the European Central Bank (ECB) to step in and help stabilize the faltering economies, but ECB president Mario Draghi said the mission of the bank is to come to the aid of troubled banks not governments.

By the end of 2011, the future of the euro was in doubt. In an effort to preserve the common currency, the 17 members of the euro zone in December said they would sign a treaty negotiated by French president Nicolas Sarkozy and German chancellor Angela Merkel to impose tighter fiscal control over members. Provisions of the treaty included imposing debt and deficit ceilings on each country, adding 200-billion euros to the International Monetary Fund's bailout account as a "firewall" to help cover Italy and Spain, and establish a 500-billion euro European Stability Mechanism. The treaty won the endorsement of the European Central Bank. "It is a very good outcome for euro area members and it's going to be the basis for a good fiscal compact and more disciplined economic policy in euro area countries," said ECB president Draghi. In all, 23 members of the EU agreed to sign the treaty, with Britain and Hungary opting out and Sweden and Czech Republic mulling the option. Sarkozy and Merkel had hoped for unanimity among all 27 members of the EU.

What Caused This Mess?

In the simplest terms, governments in the euro zone spent too much, borrowed too much, and downplayed their debt. The result: overwhelming debt that they couldn't pay back, which resulted in higher borrowing costs. In addition, European banks had been buying government bonds and lending money by putting up only cents on the dollar. When the economies of European nations went south, the banks that lent money to them inevitably followed.

Without the backing of Britain, it's far from certain if the new treaty will be enforcible—or have enough teeth to avoid a meltdown of the euro. There's no doubt, however, that the crisis is far from over.

For more information about the countries involved in the debt crisis:

Information Please® Database, © 2007 Pearson Education, Inc. All rights reserved.

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