The Eurozone Crisis

Introduction

Eurozone crisis can be seen as the most important economic problem of the European Union in the history. Because of that crisis the currency union have faced the possibility of separation which is an extremely critical issue not only economically but also politically. Until the subprime crisis which became prominent by the bankruptcy of Lehman Brothers in 2008, the economic level of the EU members were similar. When the bankruptcy occurred those countries started to differentiate in a very significant way. Total government debt and also problems of banking sector lead many countries to negative GDP growth, high unemployment rates and more importantly social unrest.

As a result of those huge economic and social issues resulting from Eurozone crisis, finding a solution to the currency problem become an urgent as well as a crucial task of the member countries. In order to fix this problem, there were many different proposals submitted by all parties concerned. Policy implementations taken by the European Central Bank have had some powerful impacts on the economy of the union, and therefore the idea concerning a separation within the union has almost disappeared. However, to be able to find an effective and permanent solution it is needed to focus on long term fiscal and monetary policies.[1]

Eurozone crisis has had huge impacts not only on the economy of the UE but also on the other countries who have economic and financial relations with the members of the union. The reason why we have decided to examine the Eurozone crisis in detail is to have a better understanding of the mechanisms behind this extremely important and complex problem and also to make accurate inferences about the solution alternatives. In our pape...

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...eighbor countries will be highly affected by the issue.

In a sense, fiscal austerity or an exit scenario is the alternative to accepting differentiated government bond yields within the Eurozone. If Greece does not leave Euro currency by accepting higher bond yields, then high interest will decrease demand, raise savings and slow the economy.[11]

The other option, an exit scenario of Germany, also causes problems for the country’s economy. As a result of loss of purchasing power in the periphery economies and additional transaction costs, German exports to these countries will decrease. Also a stronger Euro will reduce competitiveness of German exports against the rest of the world. On the other hand, Germany has significantly benefited from the latest developments inside the union.[12] It is observed that there is an increase in demand for German bonds.