What’s noticeable is that overall; thetrend of the government gross debt of the Eurozone countries has beendecreasing during the time period. At the start of 1995, Greece, Belgium andItaly had very high debt levels, and what’s apparent is that Belgium and Italymade substantial improvements over the years, thus justifying that they wereactively reducing their debt to satisfy the Maastricht criteria. Greece on theover hand, instead of decreasing had increased their debt levels by 10% overthe time period. What’s noticeable about the graph is thatIreland had held surpluses for mostly the entirety of the period and sorespected the 3% budget deficit, but was later affected severely by thesovereign debt crisis.
Germany and Spainmade efforts to have fiscal surpluses, however still remained deficitcountries. Nevertheless, their deficit levels reached the 3% criteria by 1998.What’s even more surprising is that France who’sconsidered a core member in the EU also had a high level of deficit, anddespite lowering its deficit to meet the requirements to enter the Eurozone,had increased its deficit after 2001. Another key criteria defined in the SGP wasthe Debt levels as a percentage of GDP.
Several categories were outlined by theEuropean System of Accounts that would contribute to the general governmentgross debt, which were: Currency and deposits, loans, and securities. Figure 2shows the Eurozone countries Debt/GDP levels. The creation of the Economic and MonetaryUnion (EMU) was another step forward in the processof economic integration. The benefits of economic integration is immense withcoordination of economic policy makings between Member States, the usage of thesingle currency, an independent monetary policy ran by the European CentralBank (ECB).
However within the framework of the EU lies structural problemswhich includes “the rules, regulations and institutions that govern it – isto blame for the poor performance of the region, including its multiplecrises.”1 The first problem that arose was fiscal moralhazard. “They put fiscal and debt limits at the heartof the Maastricht criteria for entry (3% of GDP and 60%, respectively)”2,and adopted a No Bailout Clause meaning no member states should not be liable,nor assume the commitments or debts of any other member states. Furthermore,the Stability and Growth Pact (SGP) was agreed, however it was this pact that played a prominent role inthe causes of the Eurozone debt crisis. To illiterate, the basic premiseof the pact was to enforce budgetary discipline to Member States using theEuro, but the key point is the two conditions that the member states have torespect: Annual government budget deficit should not exceed 3% and Debt/GDPratio should be no more than 60%.
The fiscal deficit limit was subject to theEurozone averages of 1990, as given growth and inflation assumption, theEuropean policy-makers believed the Debt/GDP ratio could be held constant at60% with an annual deficit of 3%. Giventhis, it was pretty clear that no countries would be able to uphold thesecriteria, as figure 1 shows that at some point between 1995 to 2007, allEurozone countries, except Luxemburg and Ireland had deficit levels exceeding3% of GDP. Since the introduction of the Euro in 1999,the Member States gave control of monetary policy to the European Central Bank(ECB), which sets interest rates to the Eurozone. Some countries, such asGermany and France had slow growth, and so the ECB set low interest rates.However, this was too low for booming countries such as Ireland and Spain,which contributed to the housing market bubble. Furthermore, as Member Stateshave no power over monetary policy or currency, they are more prone to adverseeconomic shocks and are unlikely to adjust due to the fact that the controlover policy instruments is held by the ECB, and countries experiencing theseeconomic shocks would see a decrease in tax levels and an increase in socialspending places pressure to the public finance.
Unlike other countries such asthe UK or USA, there is no mechanism at the central level to transfer funds as “automaticstabilisers” to help with recovery shocks. With the end of the Second Wold War, Theneed for stability and economic development post-1945 was immense, and with theestablishment of the European Coal and Steel Community in 1951, arguablysparked a chain of events that now became the European Union. The first steptowards cooperation that was necessary to create a governing body to overseeeconomic and political policies was first seen during the creation of the OEECwhich was formed by 16 nations who weren’t influenced by the Soviet Union. TheOEEC oversaw the implementation of the Marshall Plan which was an economic aidprovided by the USA to stabilise the European economies.
The European EconomicCommunity (EEC) initially was to bring about economic integration, includingcommon market and customs union, and achieved a single market in 1993. Thisallowed free movement of capital, goods, services, and people within theEEC. Some of these establishmentsprovided a framework for the Maastricht treaty, which formally established theEuropean Union. However the monetary union is riddled with structural problemsthat led to the Euro Crisis and the Greece Sovereign Debt to name a few.