Euro Crisis

What is EU crisis?

EU crisis is the deflationary and fiscal deficit situation which is currently taking placing at European Zone which is identified as a side effect of the global financial crisis 2008/2009. The real asset prices of EU zone is decreasing drastically and the fiscal deficit (deficit in the public budget) in many countries has increased leading to increase in public borrowing level of the EU countries.

Strong unanticipated deflationary pressure has reduced the real output level of economies such as Portugal, Greece, Spain, Italy and Slovenia. Since it was an unanticipated deflation it has resulted in strong negative output gap where the real output of the economies are below than the expected output level.

Reduction in the real asset prices is caused by the real asset price bubble took place in mid 2007 where the prices of real asset were made extremely low and it attracted more capital inflows to European economies. Attraction of capital as investment increased the inflationary pressures which resulted in high consumer price index in EU countries in 2007/2008. Since the abnormal situation is the economy was not corrected using monetary policy the real asset price bubble worsen and now the prices of real assets are decreasing drastically which was quite anticipatory as a consequence of poor capital inflow management.

Currently countries like Greece, Spain, Italy and Slovenia face high budget deficit, deflation and high rate of unemployment consequently. Governments are advised to increase their spending to make sure the aggregate demand boosts and the inflationary pressures are made but the problem in this solution will be since the there are budget deficit many economies are not in position to increase their government spending. Some economies have started to increase their government spending by incurring public to debt to cover the budget deficit but again this will result in a burden on interest on governments in near future.

However, the Euro crisis which is minor stage has to be solved and economies have to be managed properly to avoid Global Financial crisis phase-2 as many non EU economies are closely linked to European zone due to globalization.

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2 thoughts on “Euro Crisis”

  1. Ashfaq says:

    Nice article very useful for economics students

  2. Pingback: Are we headed for a Global Depression or is the website listed below a farce? | Economic theory

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