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What is EuroZone Crisis and Cyprus Crisis ?

What is Eurozone Crisis and Cyprus Crisis ?

EUROZONE CRISIS

  • Earlier European Union represented one economic market as an economic union with free trade with each other. The Euro Zone came into existence with the signing of Maastricht treaty signed in 1992, of a monetary union, one Central bank and single currency, replacing country specific currencies in the European Union.
  • As a result The Euro as common currency came into existence in 2002, but of the 27 member countries only, 17 members of the EU accepted Euro as the common currency and became part of Eurozone.
  • Some of the members not opting for Euro (10) especially Sweden, UK, Switzerland which while accepted Euro, also had their own respective currency and not part of the Euro zone even though part of European Union.
  • There are 6 other countries which have Euro as their currency but are not part of the Euro zone resulting in 23 countries in the world having Euro as their currency with 17 as part of Eurozone.                                                                                  What is EuroZone Crisis and Cyprus Crisis ?

The Euro zone had structural problems ever since it came into existence:

  1. Of a union of dissimilar economies, difference in sizes, economic activities, resources, technology, levels of development and incomes. On the one hand the stronger economies of Germany, France and Italy and the other “peripheral economies” like Greece, Portugal, Spain etc.
  2. Some of the Euro Zone member had strong currency before Euro came into existence like Deutsche Marks (Germany), French Francs and the Italian Lira, while other had a weak currency like Greece (Drachma), Portugal (Escudo) and Spain (Peseta) Thus monetary union was not across similar monetary strengths of economies.
  3. The larger economies especially Germany had a current account surplus while others had a current account deficit largely with Germany.
  4. There was a “Growth with Stability Pact” amongst Eurozone members which was more of an understanding rather than a “fiscal union” of debt to GDP not exceeding 60% and deficit to GDP of not exceeding 3%, which was never adhered to by the member countries resulting in “fiscal excesses”, high levels of deficits resulting in large borrowings especially by what is referred as PIGS economies, comprising of Portugal, Ireland, Greece and Spain.                              What is EuroZone Crisis and Cyprus Crisis ?

The Euro Zone crisis is a “Sovereign debt crisis” as it is government debt outside the country. (please refer to slides uploaded for class 8 & 9)

CYPRUS CRISIS

  • The Crisis Cyprus is a “banking sector crisis, “ with volume of business many multiple of its GDP, unregulated, high exposure to Greek bonds almost resulting in collapse of the second largest bank necessitating a bail out by European Central Bank.

ALSO READ : https://www.brainyias.com/currency-swap-facility/

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