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European Debt Crisis Explained

The European debt crisis refers to Europes inability to pay the debts it built up in recent decades. The
European debt crisis grew out of the U.S. financial crisis of 2008-2009. A slowing global economy exposed
the unsustainable financial policies of certain eurozone countries.
The eurozone is made up of 17 European countries that use the euro, including France, Germany, Spain,
and Ireland. Several countries in the eurozone have borrowed and spent too much since the global
recession began, causing them to lose control of their finances.
The European debt crisis can be traced back to October 2009, when Greeces new government admitted
the budget deficit would be double the previous governments estimate, hitting 12% GDP. After years of
uncontrolled spending and nonexistent fiscal reforms, Greece was one of the first countries to buckle under
the economic strain.
It was also the first eurozone country to take a multi-billion pound bailout from other European countries
(followed by Portugal and Ireland).
Fast-forward and Greece is still in a recession, more than a quarter of adults are unemployed, and the
future looks bleak. Things dont look any better in Spain, where the jobless rate is at 26%. The jobless rate
in the eurozone as a whole is at 12%; the highest level since the euro was created in 1999.
If Greece fails to pay what it owes, the country will go bankrupt and most likely become the first country to
leave the euro currency. Greeces departure could open a floodgate with other countries following suit;
thereby weakening Europes economic clout.
Today, the European debt crisis is on the brink of pulling the entire eurozone into a recession; dragging the
global economy down with it. Ten European countries have already slipped into a recession and three more
have needed to be bailed out in order to avoid going into default.
In March 2013, the government in Cyprus raided personal bank accounts to bail out the countrys financial
system; setting a dangerous precedent. While politicians are saying this is a one-time event, one has to
wonder if this tactic wont be used again elsewhere. Its not as if there isnt just cause.
While Germany has been the economic engine for the eurozone, its slowing economy could join the rest of
the region in recession. Thanks to the deep recessions in the other eurozone countries and austerity
programs, Germanys ability to carry the region is in serious jeopardy.
Germanys central bank, the Deutsche Bundesbank, is predicting growth of just 0.4% in 2013; down from a
June 2012 forecast of 1.6%. The Bundesbank also expects the jobless rate to hit 7.2% in 2013, up from
6.8% in 2012.1
That said, there is more to the European debt crisis than just debt. Despite a shared currency, the
eurozone is made up of different countries with vastly different cultures, histories, philosophies, and
economies. And those differences illustrate just how difficult it is for disparate countries to work together
with one unified voice.
In fact, the head of the Bank of England referred to the European debt crisis as the most serious financial
crisis at least since the 1930s, if not ever. 2

eeling nervous about paying the bills? Anxious? Stressed about money? Youre in good company, because
thats just how the eurozone feels.
Its difficult to get to grips with the financial crisis. Whenever somebody with a bit of authority an
economist, say, or a senior politician tries to explain whats going on, they start bandying around terms
such as bond yield, Grexit, haircut and junk. In this serialised report we try to explain, jargon-free,
whats happening in the eurozone and what the action-plan is for getting things back on track.
In this introductory section to the report, we reveal the key factors which led to the financial crisis. In PART
2 we will take a look at the different types of investment funds being adopted by investors as a way to
weather the economic storm.