US and EURO Zone Debt Crisis: A Perspective from Developing Countries (PB 30)

US and EURO Zone Debt Crisis: A Perspective from Developing Countries (PB 30)

Publication details

  • Wednesday | 31 Oct, 2012
  • Vaqar Ahmed, Syed Ul Asif
  • Policy Briefs/Papers
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Syed Ul Asif Vaqar Ahmed October 2012 Introduction and Background The European Union (EU) is currently faced with a sovereign debt crisis which started in November 2009 and became acute during mid 2010 in turn putting many European countries on the brink of default. Due to this crisis, commodity-producing as well as the service sectors have come under pressure. The banking sector now faces a paralysis for the foreseeable future. The low economic growths combined with poor forecasts are growths combined with poor forecasts are contributing to rising unemployment levels. Countries such as Greece, Ireland, Italy, Spain and Portugal are the most affected countries due to this crisis. The worst aspect is that EU faces this milieu at a time when the world was barely getting out of the debris of the global financial crisis that started in 2007. While many developing countries managed to insulate themselves from the global financial crisis it is suspected that it will be difficult to escape the direct and indirect effects of the EU debt crisis. Already India and Bangladesh have reported the cancellation of export orders from EU. Similarly many conflict-prone countries are foreseeing slashing of aid inflows originating from EU. There is also a contagion effect that is expected if this crisis prolongs. This has already started happening within EU to some extent. For example France is closely integrated with the Italian financial markets and a default to Italy will have a huge negative impact on France and its trading partners. EU as a whole will impact US which has its own on-going debt crisis which is not being helped by the rising expenditure on the war on terror. It is public knowledge now that several EU countries misreported their debt levels in violation of the international financial rules. In order to become a Euro zone member one of the conditions was that government debt to GDP ratio should not exceed 60 percent. However in the interest of European foreign policy several member states were given entry into Euro zone who did not meet this criterion. In fact this lesson is extremely important for other regional blocks now contemplating a single currency (e.g. ASEAN). Monetary unions must be careful in the manner in which they select their members.