European Debt Crisis 2011
The European Union and the entire financial position of the worlds global economy has continued to pose a rising number of challenges. This has continuously progressed from its epicenter in the Greek capital of Athens to countries such as Italy, Portugal and Ireland. The European Monetary Union has been grappling with salvaging the embattled Greek economy with concerted efforts from the EU’s larger economies, such as Germany France and Britain. The lasts victims of this extended crisis have been Spain and Italy resulting in the resignation of the Italian prime minister. This research paper seeks to address theoretical as well as practical issues that could provide the Euro zone with financial accounting and reporting frameworks that could alleviate a further decline in the future of the European Monetary Union. This paper seeks to address two possible policy frameworks which can ideally control such a crisis in future.
The first policy framework offers a list of approaches offering avenues with which to address financial liquidity as well as solvency issues facing sovereign debtors in the Euro zone. The second policy framework seeks to offer solutions through a number of core institutional reforms. These reforms are to encompass the continued and sustained growth of the Euro zone’s Financial Stability Facility, the EFSF. The reforms also aim at providing for the European Union member states to assure that bonds are issued jointly as well as being guaranteed by a number of these member states. The third reform which is most difficult to implement without opposition is the possible is the departure from the Euro zone by a European country or more so a number of European states evading being sucked into the debt crisis in the short or long term.
This research paper on the European Debt Crisis will delve into the relentlessness of the crisis as observed in the five European states and their economies, namely Greece, Ireland, and Portugal as well as the more recent victims of the crisis namely Spain then Italy. The question arising as to whether these economies can sustainably repay the massive debts and more so as to whether these states have the fiscal measures strongly in place to sustainably ensure that the debts incurred are adequately controlled as well as if the debt with regard to a state’s Gross Domestic Product (GDP) can be sustained, or be decreased to such proportions that these struggling economies can sustainably manage the debt burden.
An analytical tool to address these questions is the equation providing for sustainable debt repayments. This equation gives the principal fiscal surplus such that this level as provided for by the equation ensures that the debt is below an economy’s GDP. This equation is formulated such that the fiscal surplus represents a fraction of an economy’s GDP and should basically aim at being at par with the interest rate payable or better still exceed the interest rate above nominal gross domestic product times the preliminary debt ratio. This implies that the required fiscal surplus tends to be higher if and only if the preliminary debt ratio is also on the upper side.
In this paper, Greece, Ireland and Portugal are addressed relative to liquidity and the degree of amortization accruing as attracted by such massive financial arrangements. The support offered by the International Monetary Fund (IMF) and the Euro zone has been towards this end as will be discussed. As for Spain and Italy, the expansion of the European Financial Stability Facility (EFSF) is perceived as the best option towards ensuring that these countries sustain their liquidity levels whether or not the eventual outcome seems conceivable. It is worthy to note that the attitude portrayed by the European Union in its effort to resolve the current European debt crisis has been one with great show of profound confidence as well as towards sustainable liquidity measures and reforms.
The Greek government agreed to an economic bail out package in July this year based on its expectations that the terms of the package were towards a sustainable debt repayment program. This implies that the Greek economy expects to achieve a strong primary surplus. On the other hand, Ireland and Portugal have to ensure that solvency terms agreed upon have to met and more so the overbearing strain as to liquidity levels will have to be met through initiatives from the private sector. These bear great similarities with the bail out package as accepted by the Greek government. As for the Spanish and Portuguese economies,