The Balancing Act: Managing The European Union Debt Crisis

Rahul Rajeev
4 min readApr 8, 2017

European Union, as known today came into existence on the 1st of November 1993, by the Maastricht treaty, as an aftermath of the World War II. Historically, the different nations of Europe were in constant strife with each other, creating an array of trade barriers and institutional restrictions to collective growth; and the formation of European Union was to unite Europe to form a powerful economy. Under the European Union one monetary policy was to be followed by all member states while the fiscal policy was set individually by the respective governments. On January 1,1999, when EU introduced Euro, aimed at easing trade and boosting economic unity, within three years majority of countries switched to Euro. Currently except for Bulgaria, Croatia, Czech Republic, Denmark, Poland, Romania, Sweden and the United Kingdom all the member countries use Euro.

As a part of EU, in smaller countries like Greece, which were already facing budgetary deficits, credit was made available at lower interest rates. Fiscal policies of Greece government had no regulation over government spending, and additionally with their failure to ensure economic growth, tax revenues dwindled. The government continued financing through external credit causing budget deficit to accumulate. In 2009 the newly elected Greek government declared budget deficit to be 12.7% contrary to the under reported 3.7% by the previous government, starting the chain reaction of events that lead to the phenomenon of European debt crisis. The credit rates for Greece skyrocketed as financial institutions like the Moody’s degraded the country’s credit rating. Due to the intertwined nature of European economy, heavily indebted countries of Portugal, Ireland and Spain started sending signals of distress, setting a decline to the value of Euro currency as well as challenging the economic stability of EU.

Greece could no longer pay off any of its debts and the government struggled to keep itself running. The crisis had spread across Europe already and the economic growth came to a virtual standstill. Greece government requested bailouts and after some long negotiations International Monetary Fund disbursed 110 billion Euros as bailout to Greece. Ireland and Portugal also received bailouts in November 2010 and May 2011, respectively. The European financial stability fund was setup by EU members to provide emergency financial assistance. In August 2011, European Central Bank devised a plan to purchase government bonds, if necessary to strengthen the financial system. On December 2011, ECB provided 489 billion Euros as credit available to troubled banks of the region as a part of the program called Long Term Refinancing Operation .

In order to avail the bailouts from banking and regulatory institutions Greece had to cut its public spending at large. ECB forced Greek government to follow strict budgetary cuts, and austerity budgets were presented by the country. As a result the small scale industries which supported the Greek economy fell, increasing unemployment rates. Pension schemes were cut down and all government benefits dwindled. Austerity budget was unpopular to masses and soon the polity had to face the public uproar. Crime rates went up, and political imbalance was created as half of the popular were against the EU backed austerity budget. Economic growth declined further and citizen revenues came down, thus reducing the total tax amount available to the government. Greece reached a stage where self recovery was completely impossible. The ECB being funded by top economies of Europe like Germany, the money used for bailout came from the people via increased taxes, which created discomfort among the German population. The actions of the regulatory bodies helped to contain the EU debt crisis to an extent, but it was more of a short term remedy to refinance deficit drawn through bailouts. As smaller economies like Greece can be brought back to feet this way, bigger economies like Spain and Italy are too big to be saved.

Inadequacy in the banking and supervisory structures in responding to EU debt crisis can be attributed to different causes, but fundamentally its rooted to the one monetary policy and different fiscal policy structure of the European Union. ECB lacks any binding mechanism to ensure that member countries contain their expenditure and deficit to prescribed levels. Euro had consolidated currency production under one roof freeing it from individual political interests, similarly a common fiscal policy enforced by central body can ensure that such crisis does not come forth in future. The present system cannot guarantee against such crisis as countries are still free to spend according to their interests, which sends out a signal of distress and caution among the world economy. The EU debt crisis stands as one of the strongest concluding reasons for Brexit and political crisis stemmed out of refugee polices of different governments. Countries of the EU Union must unite with much more resolve and intent to boost their economy and device fool proof strategies to endure the economic whirl wind they are caught up in.