The European debt crisis poses a significant challenge to the economic stability of the European Union. Since economic stability is the basis of the European Union, the economic crisis seems to threaten a robust relationship that exists among member states. Currently, the European debt crisis has revived the need for integration of European member states since policymakers are reforming fiscal policies to curb the debt crisis.
Marinescu argues that the European debt crisis that has affected banking sectors and economic dynamics of various countries emanated from the global economic crisis that rocked many economies in 2007 and 2008 (95). Hence, it means that the debt crisis that European countries face has both internal and external factors that define economic dynamics. Therefore, what are the causes, implications, and solutions of the European debt crisis?
Numerous economic factors have contributed to the occurrence of the European debt crisis that is threatening the economic stability of the European Union. Marinescu states that long-term growth of credit, enormous liquidity, low-risk premiums, soaring asset prices, strong leveraging, and bubbling of real estate are dominant factors that increase the debit crisis (95). Failure by individual member states to control these factors cumulatively led to the occurrence of the debt crisis that has weakened the economic stability of the European Union. Since economic policies do vary in various states, policymakers have focused their policies in alleviating the impact of the debt crisis in each state.
The European debt crisis has a considerable negative impact on financial markets because they are very volatile and sensitive to the internal and external dynamics of the economy. Economic experts predict that the debt crisis seems to persist and will have a considerable negative impact on Europe’s economy. Europe is on the verge of economic crisis due to an increasing debt crisis, which has an overwhelming effect on economic stability and growth.
According to Valiante, for the European Union to survive economically, it must formulate integrated fiscal policies that are critical in stabilizing volatile markets that are prone to internal and external forces of the economy (11). In essence, policymakers should build strong fiscal policies to guarantee economic stability by reducing the impact of the debt crisis across all states. Thus, harmonization of both fiscal policies and trade policies is central in alleviating the economic impact of the debt crisis.
Since the European debt crisis appears to be a complex economic problem, fundamentalists and monetarists are two schools of thought that elucidate its occurrence. According to fundamentalists, the debt crisis did occur because various states lacked discipline in adhering to fiscal principles of macroeconomic management of finance. Hence, fundamentalists believe that strong fiscal policies that would strengthen and stabilize financial markets are essential in easing the impact of the debt crisis.
Comparatively, monetarists believe that the debt crisis originated from a liquidity crisis in a given locality. Collignon argues that a liquidity shock in a given locality triggers a rapid deterioration of a certain class of assets and reduces capital in banks, thus causing systemic financial crises across the world (1). In this view, liquidity of certain assets considerably affects the European debt crisis. Therefore, alleviation of the debt crisis requires long-term as well as short-term interventions for effective management of liquidity among European states.
The major economic challenge that the European Union is grappling with is the debt crisis. The debt crisis has been increasing for the past decades due to differences in fiscal policies that are in every state. Moreover, globalization forces of the economy coupled with unequal economic capacities of member states have contributed to an increase in the debt crisis. Hence, the harmonization of fiscal policies is critical for the European Union to curb the increasing debt crisis that threatens its survival.
Works Cited
Collignon, Stefan. “Europe’s Debt Crisis, Coordination Failure, and International Effects.” ADBI Annual Conference (2011): 1-27. Web.
Marinescu, Ana-Maria. “The Debt Crisis: Causes and Implications.” University of Ploiesti Bulletin 63.2 (2011): 95-104. Web.
Valiante, Diego. “The Eurozone Debt Crisis: From its Origins to a Way Forward.” Center for European Policy Studies (2011): 1-12. Web.