The Origin and Significance of European Sovereign Debt Crisis Essay

The Origin and Significance of European Sovereign Debt Crisis - Essay Example Indeed, despite Germany being at the centre of the origin of the European debt crisis, there were other players who had the authority to save the euro member countries from plunging into this crisis. Introduction Manolopoulos (2011) refers to the European sovereign debt crisis as a financial crisis which has caused some Eurozone countries to have difficulties in refinancing respective government debts unless a third party intervenes. The decade preceding 2009 saw the Eurozone achieve much success economically with the European Central Bank, ECB achieving its policy objectives. The inflation was maintained at low with an almost equilibrium GDP. The use of a single currency reduced the cost of transactions with the greatest effect being on territories of countries where financial interactions were intense. Nonetheless, Grahl (2011) noted that with a single currency, member countries lose control of their currencies. As such, the exchange rate becomes fixed and in times of competitiveness problems, the country would not devalue or allow depreciation of its currency. During the crisis of the sovereign debt crisis, Britain was cushioned against this because of not being a member of the Eurozone. Secondly, these countries lose the control of domestic interest rates which influence investment and consumption effectively affecting the economy. It would only be beneficial if the member economies move at par. But with discrepancies, with others in recession while others face inflation, this becomes costly. The average good performance of the Eurozone hid some of these misgivings and individual performances of these countries. For instance, countries negatively affected by the Eurozone debt crisis had inflation rates of above 2% despite the average inflation of the Germany, the largest economy in the Eurozone being always being lower than 2% (Grahl 2011). While Germany had gradual growth, the other countries had domestic booms and entered into debt crisis with Greece being the first casualty followed by Ireland, Portugal, Spain and Italy in that order, with their account deficits being traced back to 1999. These countries borrowed for their domestic financing from abroad such as the housing developments in Spain and Ireland and government spending in Italy financed by German household savings. These financing was given when these countries were unable to service these debts in the long run. Instead of financing human capital and productive projects that would lead to higher future returns, the investments were on public and private consumption and on wasteful construction projects. According to Conquest (2011), financial crises resulting from housing booms would normally lead to sovereign debt crisis. Grahl (2011) further argues that sovereign debt crisis would be further propelled by fears of government’s insolvency as it would fail to pay capital and interest on its bonds. Eventually, capital markets get closed and the governments forced to default. The local currency would then depreciate followed by