Eurozone Crisis Causes

The Cause of Euro Crisis

The Eurozone crisis was triggered by a combination of some complex factors that can be traced as far back as 2002. Seth et al (2011) and Mourlon-Druol (2011) listed some of the factors as;

• high-risk lending and borrowing caused by the extremely easy credit conditions that characterized the Eurozone financial sectors between 2002 and 3008;

• globalization of financial;

• the Great Recession of 2008-2012;

• international trade imbalances;

• governments’ fiscal policy choices;

• methods adopted by states for bail-out of troubled banking institutions and private bondholders;

• private debt burdens;

• real estate bubbles or socializing losses etc

The origin of the crisis can be traced to the early 2000s when some

Shambaugh (2012, p.157-160) identified Eurozone natural structure as the first of such factors. Structurally, the Eurozone has one currency, but lack a reputable and efficient fiscal union. The absence of fiscal union implies that certain policies like, taxation policies and public pension rules differ from one country to another. The existence of one currency without a complementary fiscal union limits the European leaders’ ability to respond to the crisis. Another factor responsible for the spread and severity of Eurozone crisis is the significant amount of sovereign debt owned by the European Banks. So huge was the debt that concerns as regards to the solvency of banking systems, as well as the sovereigns are negatively reinforcing. DeGrauwe (2010) noted that the basic cause of the government debt crisis is mainly the unsustainable accumulation of debt by the private sectors. In other words, the poor performance of the SGP has very little role to play in this

The crisis was specifically characterized by accumulating debt levels and extremely high structural deficits of the government. Unfortunately, the Great Recession left a weakened banking sector that has already recorded huge capital losses. The strong relationship between the survival of many Europeans government and their financial stability prompted the government to bail out banks that were badly affected by the Great Recession (Obstfeld et al 2009, 480-486). Thus, the banking sector is obviously in a very weak condition to intervene in the