European Debt Crisis

European Debt Crisis

The collapse of the Greek economy contributed to the terrible debt crisis Europe experienced in the recent past. Greece was unable to meet its financial obligations with its borrowers and others who held the countries bonds. Many banks such as the European Central Bank (ECB) were taking huge losses of 50% or more from the unpaid debt. This situation is similar to what happened here in the United States when the housing bubble burst, and millions of people walked away from their homes as interest rates & house payments surged.

European countries such as Portugal, Ireland, Italy, Greece & Spain were over-leveraged, and had too much debt relative to the size of their economies. These countries grouped under the acronym known as PIIGS are some of the most highly leveraged Eurozone countries. Most people knew if a disaster was to happen, it will start with a country in this region. Italy's debt is 121 percent the size of its economy. Ireland, that figure is 109 percent. In Greece, it's 165 percent (Eichler, 2014). Countries like Ireland and Spain experienced real estate & housing bubbles that ultimately caused massive losses to the banking institutions and their governments had to step in to rescue some of them, just like in the United States. These countries experienced huge deficits due to massive decreases in tax revenues and not being able to cover their countries expenses.

Greece however, contributed the most damage to this crisis by borrowing beyond its means to pay back its loans and had little economic production to help offset its obligations, and creative bookkeeping prevented Eurozone authorities from realizing the true extent of the situation. The deficits weren't piling up everywhere as countries with strong economies like Germany and France were keeping their output high and their debt at a manageable level, but when 17 nations use the same currency trouble spreads quickly (Eichler, 2014). In addition, this crisis caused foreign investors to pull their finances out of these countries and where unwilling to buy government bonds as investments. For example, companies in the United States will not invest in companies like Greece or Ireland if they know they are heavily in debt, and may not want to invest in neighboring countries that are part of Eurozone because they may have to assume the responsibility of paying back the debt of their struggling neighbors can’t.

It’s possible that the European crisis began when the euro currency was first introduced to countries around Europe. The idea that a single currency could meet the needs of 17 economies may have been inherently flawed (Eichler, 2014). For example,