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An Analysis of the European Debt Crisis: Its Etiology, Current Status, and Possible Future Direction

Abstract The current European Debt Crisis has its roots in the long-term indebtedness of certain European countries that share a common currency and have no individual control over the setting of suitable interest rates for their economies. Competitive devaluations are thus not possible on a national basis, but government debt is still left up to individual nation states to control and repay. In 2008, a worldwide recession started and industrial output decreased by 20%, while developed and emerging economies’ output fell by around 24% and 14%, respectively (Blundell-Wignall, 2012). This paper will first describe the pre-existing conditions, such as the requirements for admission to the EU and the background to the current crisis; secondly it will explore the impact of the credit crunch, and thirdly, analyse problems in Greece, Portugal, Spain, and Italy and the wider impact of Eurozone instability. It will then explain the types of sovereign bonds in existence and their valuation and further examine the action the EU has taken. Conclusions will be drawn as to three possible developmental scenarios, including the implications of a Eurobond, and recommendations will finally be made.