Euro Crisis

EUROPEAN
DEBT CRISIS
Understanding the
European Debt Crisis
with focus on Greece
After WW2 European countries came together to avoid
another catastrophe and promote cooperation by
removing barriers such as tariffs and exchange rate
which led to the idea of European Union with the
Maastricht treaty:
Which implies that to be part of the Euro you have to
adhere
4 criteria:
1. The country spending must be less than 103% of its

GDP
2. The country’s debt must be less than 60% of its
GDP
3. The country must have low inflation
4. The country must have low interest
Let’s put in our consideration that the country that
will join the Euro-zone
Will enjoy the benefits of :
1. Price and exchange rate stability .

2. Sound public finance: countries could have
more loans with lower interest rate.
3. Increased investment and trade .
4. Reaping full benefits of the European Union
internal market
Country like Greece wanted to enjoy
those benefits but the problem with
Greece is that it didn’t fit the criteria as
it was having massive spending to boost
social benefits which raised its debt to
94% of its GDP, and the requirement in
order to join the Eurozone was to have
that at most 60% of its GDP.
That lead Greece into two choices :
1. To radically cut back on spending.
2. Or to miss the Eurozone
well that unless it has a third option: (Golden Sachs idea)

So Goldman Sachs and American investment bank came
up with the idea that will Give Greece is a win-win
situation which was in order to meet the Eurocurrency
adoption criteria Grace has to lie and mask about the
government debt load by the currency swaps as by this
way Greece can avoid the radical reforms including the
spending and take the advantages and benefits of the
Euro which a win-win situation and in 2001 Greece
adopted the euro as its currency.
But to be part of the EURO means
•monetary policy of the country is handled by
the European Central bank which includes the
money supply and the interest rate
•fiscal policy Will still be handled by the
country’s government(tax and spendings)
So countries like Greece could enjoy the

benefits of the Euro borrowing more With
cheaper interest as if there is any default the
other European strong economies like Germany
will pay this debt because they have the same
currency .
Hence Greece took advantage of
that and borrowed lots of money
In order to achieve economic
growth and spend even more on
the social benefits ;yes Greece
was having a boom and increased
the GDP but what made that
worsen is that they were with even
more debt in order to pay the
previous debt, We will notice from
figure 1 and 2 that the debt in
2007 was 107% of the GDP, the
debt is exceeding the GDP.
So to make sure that the European Union Don’t notice
about that huge borrowing they simply lied again about
how much debt they really had .
But then the 2008 financial crisis hit:

Which lead that banks that was giving loans to Greece
went bankruptcy
And now something in Greece has no one to borrow from
and here the
Debt crisis started , And after a year of recession Greece
was on the verge of bankruptcy and couldn’t function.
In 2010 the after the elections
and the new socialites
‘government won they
announced that the public debt
was doubled more than that it
was estimated before the
situation was much worse when
the Greek bond holder started
selling there bond in February
2010 then the
financial institutions started
downgrading it .As we see the
evolution of the Greek bond
rating during the past 20
years .
What government usually do in this situation was
if they have control over their monetary policy :
• Print more money to pay off their debts

• Which decreases the value of their currency
• Meaning that their products became cheaper for
foreign consumers and tourists
• Hence increasing exports and investment
BUT this was impossible for the Euro because the European
Central bank controls It .
So Eurozone countries had to help Greece because:
• If Greece went bankruptcy European companies may go
bankruptcy and most of European countries would go
bankruptcy as well
also another choice for Greece was to do a Grexit from the
European Union which might threaten diary being union
causing other to exit as well
.
Response of the
European union:
Eventually one of the European countries had to take up
the responsibility to repay the debts in order to avoid the
collapse of European union in the country being that
European superpower “Germany”
Note : their were two schools to solve the problem in the

short run one being “the austerity measure” two was “
keynes’ ideas”
Germany agreed but also put forward certain
AUSTERITY MEASURES :
What do austerity measures mean ?
contractionary fiscal policies which means cuts in public

expenditure, selective tax hikes, pension reforms and
reductions in labour protection.
Austerity measures are considered to be components
of contractionary fiscal policy ,
They are enacted only in desperate times, most often when a
government is about to default on its debt.
When a government increases its taxes, it generates more
revenue.
When a government reduces its spending, it has more money
to pay down its debt.
Goals of austerity :
• Avoid the accumulation of deficit which increases the total
debt
• Reduce high inflation
• Limit over-investment and speculative bubbles
The effects of austerity measures:
1) job destruction.
2) cutting down public sector wages.
3) increasing income taxes leaded to backlash from the
public.
4) high unemployment rate.
5) Greater income inequality.
6) More people at risk of poverty.
The situation became much worse. And during
The past June “S&P global ratings” reduced its rating
about the Greek debt again to CCC
which is the lowest rating in any government in the world.
Note:
Kensyan solution which wasn’t taken into consideration in
the short run:
Kensyan economists believe that in a period of recession
more government spending is needed in order to boost
the economy in the short run
Kensyan's ideas was:
1-Fiscal devaluation
2-Building multi-million Euro project
3-Lower interest rate
If this was followed their spending will increase which will
post the aggregate demand which will finally cause the
economy to expand.
Conclusion
of the
causes:
Adopting single Monetary policy :
Membership in the Euro zone established a single
monetary policy , preventing individual member states
from acting independently . In particular they cannot
create Euros in order to pay creditors and eliminate their
risk of default . Since they share the same currency as
their (euro zone) trading partners , they cannot devalue
their currency to make their exports cheaper , which in
principle would lead to an improved balance of trade ,
increased GDP and higher tax revenues in nominal terms.
Different Fiscal Rules :
In the Euro zone system , the countries are required to follow a
similar fiscal path , but they do not have common treasury to
enforce it . That is , countries with the same monetary system
have freedom in fiscal policies in taxation and expenditure . So ,
even though there are some agreements on monetary policy
through the European Central Bank , countries may not be able to
or would simply choose not to follow it . This feature brought fiscal
free riding of peripheral economies , especially represented by
Greece , as it is hard to control and regulate national financial
institutions .
Globalization of finance and low cost borrowing:
easy credit conditions during the 2002–2008 period
that encouraged high risk lending and borrowing
practices. And low interest rate encouraged countries
like Greece and Portugal to borrow and spend beyond
their limits.
High Sovereign Debts:
Which resulted in a widespread failure in the European
Union’s financial system. Greece’s debt was at 113% of
GDP which made the country need a
multiple assistances to pay back its creditors .
•Loss of confidence :
When countries like Greece started defaulting its
creditors , financial institutions lost their trust on the
Euro - Zone countries This enhanced the crisis .
•The global 2008 financial crisis:
This crisis shocked every country across the world which
make investor confidence plummeted as financial
institutions crashed, and housing bubbles exploded so
investors demanded higher interest rate from banks
which increasing the cost of borrowing .Economies as
Greece depended heavily on dept. to survive which make
the value of their existing debt also increased with
interest rates.
•The EU’s Austerity Measures
It was government policies which amid to reduce public
sector dept like :
Limited the amount governments could spend on public
good .
Cut down public sector wages
Increased income taxes.
Countries like Greece was also asked to cut down
healthcare spending, which led to a crisis in the health
systems .
Thank You
Under The Supervision of
Dr. Noha Nagy
Names
Maryam Mostafa Mohamed

Mayar Badr Gomaa
Sara Abdallah
Mohamed Abdelaziz
Rimon Tharwat
Basma Saleh

Euro Crisis

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EUROPEAN

1. The country spending must be less than 103% of its

1. Price and exchange rate stability .

well that unless it has a third option: (Golden Sachs idea)

So countries like Greece could enjoy the

But then the 2008 financial crisis hit:

• Print more money to pay off their debts

Note : their were two schools to solve the problem in the

contractionary fiscal policies which means cuts in public

Maryam Mostafa Mohamed

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