Will current EU policy reactions and economic reforms help euro zone to recover from the European Debt Crisis?


Following the world financial crisis in 2009, government and private debt levels rose in many countries of the world. Credit conditions were also made easy between 2002 and 2008 in the euro zone, allowing for high-risk lending by banks until it reached a point where the banks required bailouts (Giles, 2010). Government debts were downgraded in some countries of the euro zone as a group of 10 banks requested for bailout due to rising debts. As a result, governments were unable to repay their debts without assistance from the European Central Bank and the IMF. This led to the sovereign debt crisis that is currently experienced in Europe. The crisis has led to declining output and economic growth in Europe because investors do not get funding for their investments (Alderman, 2014). This is because interest rates have risen significantly due to the euro zone crisis. The crisis has caused undercapitalization and liquidity problems for banks. The economic growth of the euro zone was forecasted to decline by 1.8% (Alderman, 2014).

Several economic reforms and policy reactions have been initiated by European Commission, European Central Bank and IMF (Alderman, 2014). While these policies have enhanced rising economic growth of the euro zone, full recovery will take several years in some member countries of the euro zone due to various controversies of the policy and economic reforms.

Economic reforms and policy reactions

One of the policy reactions was bailout of various banks and governments. The Troika commission was also formed by the IMF, the European Commission and the European Central Bank. The Troika identified countries that needed bailouts and agreed on the terms of bailouts. The European Financial Stability Facility was also formed to enhance financial stability through financial assistance offered to countries facing financial difficulties. The EFSF offers financial assistance through bonds and other financial instruments. EFSM was also formed by the European Union to provide emergency funds which are guaranteed by the European commission. EU’s budget is used as collateral in providing such emergency funds (Hewitt, 2010). Another policy reaction was the 50% write-off of the Greek sovereign debt in various banks. This was agreed by the euro zone countries in a meeting held at the Brussels. European Central Bank also used open market operations to buy private and government debt securities of up to €219.5 in 2012 (Alderman, 2014). The ECB also changed its policies regarding credit rating for deposits and loans.

Economic reforms and proposals have also been suggested to overcome the sovereign debt crisis. One of the economic reforms was to offer direct loans to banks. Euro zone leaders commissioned the ESM to offer such loans in order to reduce sovereign debt and strengthen the Euro. Another reform was to reduce austerity measures and increase investment. Austerity measures have been criticised by some economists including Paul Krugman who asserts that austerity measures are Keynesian policies such as deflationary policies in Spain and Greece only serve to lengthen and strengthen economic recessions rather than solving sovereign debt crisis. Countries that face European debt crisis should also engage in international competitiveness in order to enhance economic growth (Hewitt, 2010). Policy makers in Europe have attempted to improve the competitiveness of various European countries by depreciating their currency. Ireland also moderated its wage structure in order to enhance its competitiveness.


There are various controversies surrounding the above policy reactions and economic reforms. First, bailouts for European governments and banks demonstrate the violation of European treaty. Maastrich Treaty which was signed in 1992 contains a clause that prohibits intra-EU bailouts (International Monetary Fund, 2003). The treaty restricts the responsibility of repaying public debt to national jurisdiction. However, Greece and other most affected European countries were granted bailouts by the EU commission despite the provisions of the treaty which restricts such bailouts. This fiscal policy resulted in risk premiums that spilt to other European partner countries; hence increasing the impact of sovereign debt countries in the EU (Aizenman et al, 2013). Most European countries also violated the Stability and Growth Pact of the treaty which required member countries to maintain government budget deficit at 3% of their respective GDP and gross government debt at 60% of the GDP. Credit rating agencies also fueled the debt crisis by offering more than required ratings and took a lot of time to adjust during periods of crisis.

Some members of the Euro Zone also argued that the crisis was motivated by political and financial interference. The Greek Prime Minister Papandreou is one of the leaders who hold on to that position (Hewitt, 2010). This is mainly exacerbated by the media, especially English-language press (Giles, 2010). Some commentators also argue that the euro is attacked so that the UK and the US can fund their government deficits and prevent the US dollar from collapsing (Japerg, 2011). The Greek and the Spanish leaders also argue that financial speculators worsen the euro crisis by short selling euros (Roberts, 2010). These controversies show that it is difficult to solve the European sovereign debt crisis because it is interfered with by some interested parties within and outside Europe.


While the economic reforms and policy reactions are likely to solve the problems that cause European Sovereign debt crisis, various controversies undermine such efforts. Various controversial debates going on about the debt crisis affecting the euro zone are likely to slow down such efforts; hence full economic growth recovery is not likely to be achieved in the near future. Alderman (2014) suggests that even though the economy of Europe seems to be improving, reality presents a more fragile situation.

According to Alderman (2014), politicians have declared the end of worst moments in the euro zone’s debt situation. This is supported by the observation that borrowing costs in banks have reduced significantly in Europe. However, the recovery of overall economy in Europe is undermined by its uneven nature. Alderman (2014) postulates that strong countries in the Northern Europe are experiencing faster recovery, while a large number of weak Southern economies is far from recovering. This means that it will take several more years before the overall economy of Europe picks up.

This uneven recovery of Europe’s economy is in line with the controversies presented by various commentators and political leaders. The suggestion that the euro is undermined by some agencies, speculators, politicians and members of the media who seek to manage their government debts is likely to enhance uneven recovery of Europe (Alderman, 2014). The strong economies with a great influence on the Euro seek intervention mechanism for the benefit of their economies. This controversy leads to more economic growth in the strong economies than the smaller economies. As a result, this enhances slow overall growth.

According to Aizenman et al (2013), constraints on the use of monetary policy and membership of the European currency union pushes up rates in some countries of Europe. Such economies therefore experience lower levels of recovery. While economists expected the economic growth of European Union to rise by about 2.0%, it actually rose by only 0.8% in 2013 (Alderman, 2014). The economic growth rate of Europe is 2% smaller than the rate recorded before the crisis. Economists suggest that this rate of growth is smaller than the rate of recovery from the Great Depression in 1930s. Only Germany and France have reached pre-crisis rates of economic growth while other countries such as Greece, Italy and Portugal are either stagnating or shrinking.

Despite the slow rate of recovery in some countries of Europe, there is an optimism of growth as investments are rebounding. However, it seems austerity measures such as tax increase and spending cuts like the one experienced in Greece since 2008 are failing to bear fruits. Alderman (2014) argues that countries which engaged in policy reactions in areas such as taxation, spending and labour markets are not realizing economic recovery as expected. Instead, these reforms seem to impede the recovery (Alderman, 2014). Optimism in some countries is cancelled by poor recovery in other countries.


The above analysis indicates that the economy fails to recover in some countries such as Greece and Italy while picking up in others such as Germany. This is caused by the overlap of controversies and policy reactions which only serve to rebound the economic growth of the overall Euro zone. While these policies have enhanced rising economic growth of the euro zone, full recovery will take several years in some member countries of the euro zone due to various controversies of the policy and economic reforms.


References list

Aizenman, J., Hutchison, M. and Lothian, J. (2013). The European Sovereign Debt Crisis:Background and perspectives, overview of the special issue. Journal of International Money and Finance, 34, 1-5.

Alderman, L. (2014). Full Recovery still Years Away for Many in Euro Zone. New York Times, Accessed May 28, 2014 from     http://www.nytimes.com/2014/05/16/business/international/full-recovery-still-years-away-for-many-in-euro-zone.html?_r=0.

Giles, T. (2010). Anglo-Saxon Media out to Sink Us, Says Spain. The Guardian, Accessed May 29, 2014 from http://www.guardian.co.uk/world/2010/feb/14/jose-zapatero-media-spain-recession.

Hewitt, G. (2010). Conspiracy and the Euro. BBC News. Accessed May 29, 2014 from             http://www.bbc.co.uk/blogs/thereporters/gavinhewitt/2010/02/conspiracy_and_the_euro.

International Monetary Fund (2003). Fiscal Adjustment in IMF-supported Programs, Washington, D.C.: International Monetary Fund.

Japerg, S. (2011). Dollar Faces Collapse: Current Concerns. Swiss Broadcasting Corporation, Accessed May 29, 2014 from     http://www.swissinfo.ch/eng/business/Dollar_faces_collapse.html?cid=30012940

Roberts, M. (2010). Spanish Intelligence Probing Debt Attacks Report. Reuters, Accessed May 29, 2014 from http://www.reuters.com/article/idUSLDE61D04V20100214.

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