Global Finance in Practice 8.2 European Sovereign Debt - write a page summary

The European Union is a complex organism compared to the customary structure of fiscal and monetary policy institutions described in the typical Economics 101 course. With the adoption of a common currency, the EU members participating in the euro gave up exclusive rights over the ability to print money (to service debt). Because it is a common currency, no one EU member has the right to simply print more euros that is the policy realm of the European Central Bank (ECB). The members of the EU do have relative freedom to set their own fiscal policiesgovernment spending, taxation, and the creation of government surpluses or deficits.

Following the onslaught of the global financial crisis in 2008 2009, a number of EU member countries suffered significant economic crises. Part of their economic woes included growing fears over their ability to service their outstanding sovereign debt. As seen below, these market fears and concerns drove the cost of their funds on the international marketplace very high, showing a dramatic separation of sovereign debt costs

European Sovereign Debt Interest Costs Percent (euros) 30 In January 2012 the government of Greece borrowed at rates which were 2400 basis points -24%-higher than the government of Germany 25 Greece 20 15 Portugal 10 5 Ireland 0 Germany Source: Long-term interest rate statistics for EU member states, European Central Bank, www.ecb.int/stats/money/long 10-year maturities. Oct-12 UT Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Jan-13 pr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 European Sovereign Debt Interest Costs Percent (euros) 30 In January 2012 the government of Greece borrowed at rates which were 2400 basis points -24%-higher than the government of Germany 25 Greece 20 15 Portugal 10 5 Ireland 0 Germany Source: Long-term interest rate statistics for EU member states, European Central Bank, www.ecb.int/stats/money/long 10-year maturities. Oct-12 UT Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Jan-13 pr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14