To understand the European sovereign debt crisis, one must get acquainted with two terms–eurozone and sovereign debt crisis. The euro area, or the eurozone in common parlance, is an economic and monetary union (EMU) of 17 European Union (EU) member states that have the euro (€) as their common currency. The eurozone comprises Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Other EU states can join but for that they have meet certain criteria.
A sovereign debt crisis is the inability or refusal of the government of a sovereign state to pay back its debt in full.
The European sovereign debt crisis is the product and function of the neglect of age-old principles of fiscal prudence and financial responsibility. Globalization of finance helped exacerbate the problem, but the root causes include: easy credit policy conditions during the 2002-2008 period which created, among other things, real-estate bubbles; imprudent fiscal policies by the countries which are now suffering badly; and international trade imbalances.
There is no uniformity in the spread of the crisis. While Ireland was hit because of reckless banking (excessive debt given to realtors without adequate due diligence and the subsequent government bailout, at the expense of the taxpayer), Greece continued with its socialistic policies with huge entitlements to public employees and went bankrupt.
Why we should worry
The globalization of finance means that no country remains immune to financial crises. It happened after the 2008 financial meltdown; it is happening now. Some politicians, including German Chancellor Angela Merkel, have blamed hedge funds and other speculation instruments for the crisis. While the ill effects of speculation are often exaggerated, policy paralysis at home can make speculative dangerous for India’s economy.
Another reason is that the EU is India’s second largest trading partner. If Europe is in a bad shape, our exports can’t do well.
Signs of the European sovereign debt crisis became evident two years ago as investors got worried about the high debt levels of many nations; downgrades followed. In early 2010, there were concerns about the capacity of Greece, Ireland, and Portugal to re-finance their debts. On 9 May 2010, Europe's Finance Ministers constituted the European Financial Stability Facility (EFSF) and cleared a revival package worth €750 billion. October 2011 witnessed eurozone leaders okay another package to help resuscitate member economies.
In early December, German Chancellor Angela Merkel and French President Nicolas Sarkozy adopted an approach that has scant regard for national sovereignty. Backed with German funds, and keen on fiscal prudence, it relies on policies that would not find favor with the Greek profligacy.
UK’s splendid isolation
Meanwhile British Prime Minister David Cameron has pointed out that the eurozone must be much more closely integrated. Wary of the EU’s centralized regulation and potentially oppressive taxation against the City of London, he preferred to follow the Thatcher line of isolationism (see box). BBC is angry that the UK would be “isolated” if Cameron persists with this policy.