Eurozone Crisis: Impacts

Prepared for: Syeda Mahrufa Bashar Assistant Professor Course Instructor: F403 International Finance

Prepared by: Tabassum Jahan RH 59 Iftekhar Niaz ZR 69 Kazi Noman Ahmed ZR 74 Mahmudul Hasan ZR 90 Akif Ahmed ZR 104 Bachelor of Business Administration Batch 18

Institute of Business Administration University of Dhaka December 14, 2013

The Eurozone Crisis

Introduction
Actually the Euro crisis is just the state version of the debt crisis being faced by millions of people today. Many people in Western economies found cheap credit readily available, at very low interest, to people who are not really able to pay it back. This explosion of credit supported many individuals and families who got carried away, borrowing much more than they could afford, spending the money on luxuries that they couldnt afford. The same happened in the case of European Union. When the Euro was formed it enabled many countries like Greece, Spain, Portugal & Ireland amongst others to borrow money at extremely low rates of interest, rates that had never been available to them in the past. These countries spent massive amounts of money on public sector workers, infrastructure and if we use Greece as a specific example, events like the Olympics. They simply borrowed much more than they could afford to pay back or even pay the interest on. Everyone would agree that in theory when youve borrowed too much you should tighten your belt. The problem is when youve become used to a certain standard of living this is much easier said than done. People in the western world used banks, brokers and accountants to consolidate their debts and in some cases manipulate the figures. They took out bigger loans or mortgages and spread them over longer terms to make the debt repayments affordable. Unfortunately, these people never learnt their lesson and stopped spending. It actually just enabled people to borrow even more money which they did. The countries currently engulfed by the Euro crisis fell into the same trap. Instead of tightening their belts some countries in the Euro, especially Greece used banks and accountants to find ways to hide their precarious debt situation. They managed to hide the amount of debt they were in so lenders still viewed them as credit worthy, allowing them to borrow even more and get into an even bigger mess.

Figure 1: A yield of 6% or more indicates that financial markets have serious doubts about credit-worthiness.

As many people have realized regarding their own debt crisis eventually you run out of ways to hide or consolidate your debt mess. When you are finally seen to be over indebted, the sad fact is the situation can very quickly spiral out of control. Lenders dont want to lend you money anymore. You cant remortgage, consolidate or balance transfer your debts. The lenders that are willing to lend want higher rates of interest making your problems even worse. This is what has happened to Greece and other overly indebted countries of the Euro. When it came to light just how big Greeces debt problems were, lending to the country effectively froze. Those that would still lend money to Greece wanted higher interest rates exacerbating the problem. This meant Greece couldnt refinance its debts and needed a bailout. The fears created in Greece then spread to other countries that were perceived to be risky. Now imagine the finances of everyone on the street in which you live are linked together. You live responsibly, work very hard and have a modest standard of living. Your neighbor however doesnt work as hard as you, regularly buys flash new cars and holidays 3 times a year. Before long it comes to light that your neighbor is massively in debt and can no longer pay his debts. As the finances of everyone in your street are linked together, your neighbor then asks you to pay his debts for him! As in this figurative street, all the countries of the Euro are interlinked financially. Some of the less responsible countries are now in trouble with their debts and are asking the more responsible ones to pay their debts for them. If one country like Greece falls; its very possible that all the countries of the euro will fall with it. If they all fall, its also very possible the worldwide economy will be dragged down with it! So again imagine that all the neighbors on your street are interlinked financially and are members of a joint bank. This bank holds your savings and uses those savings to provide risky loans and mortgages to your neighbors. A few your neighbors suddenly look likely to

default on these risky loans. The financial problems this could cause for your joint bank might cause the bank to fail, taking your savings with it! Would you now chip in to help pay the debts of your irresponsible neighbors, if it worked in your favour financially, preserving your savings? This is the biggest dilemma when considering a Euro-zone break up. Euro-zone banks have lent so much money to the Euro-zones indebted countries that if one or more of these countries were to leave the Euro and default on its debt; it could bring all the banks of the Euro-zone and perhaps even the world banking system crashing down with it. This may sound like an exaggeration but its not. It could make the recent credit crisis less dangerous. As things stand Euro-zone leaders are desperately seeking to find a way to prevent this banking collapse. So the Euro crisis is very similar to the debt crisis being faced by millions today. The difference is that the finances of all the countries of the Euro are so interlinked, that if one country leaves and defaults on its debts the dominos could soon start to fall sending the whole banking system crashing down with it.

Timeline of the Crisis

2009 19 October George Papandreous new socialist government reveals a black hole in Greeces accounts. He admits the budget deficit will be double the previous governments estimates and will hit 12% of GDP. The FTSE 100 falls 200 points to 5042. 8 December Borrowing costs begin an upwards spiral made worse after rival ratings agencies S&P and Moodys begin moves that soon categorize Greek debt as junk. 17 December Thousands of Greek workers backed by militant trade unions strike and international confidence in the economy plummets following second downgrading of its creditworthiness in as many weeks. (Mead & Blight, 2012) 2010 14 January Greece unveiled its Stability and Growth Program which aimed to cut deficit from 12.7% in 2009 to 2.8% in 2012. 10 February Thousands of Greek civil servants staged a 24-hour strike shutting schools and grounding flights as the government planned to freeze pay and pensions. 5 March New Greek public sector wage cuts and tax increases were passed to generate an estimated saving of 4.8 billion. Measures include increasing value-added tax by 2% to 21%, cutting public sector salary bonuses by 30%, increases in fuel, tobacco and alcohol consumption taxes and freezing state-funded pensions in 2010.

11 March Greek public and private sector workers strike. 23 April Greece officially asks for the disbursement of money from the aid package effectively activating it. 27 April Standard and Poor's downgrades Greece's debt ratings below investment grade to junk bond status. S&P downgrades Portuguese debt two notches and issues negative outlook, warning that further downgrades to junk status are likely. Stock indices around the world drop two to six percent on the news. 28 April S&P downgrades Spanish bonds from AA to AA-. 5 May General nationwide strike and demonstrations in two major cities in Greece turned violent. Three people were killed when a group of masked people threw petrol bombs in a Marfin Egnatia Bank branch on Stadiou street. 6 May Concerns about the ability of the Euro-zone to deal with a spreading crisis effectively caused a severe market sell off, particularly in the United States where electronic trading glitches combined with a high volume sell off produced a nearly 1,000 point intra-day drop in the Dow Jones Industrial Average, before it recovered somewhat to close down 347. 20 May Fourth strike in Greece against wage cuts. 24 May Greek government is announcing deficit reduction by 41.5% for the first four months. 27 May Debate rages in UK House of Commons about the prospect of Great Britain entering a similar financial crisis. These exchanges become known as The Greek Defence. 7 September Finance Ministers of the EU countries approve the second of the bailout installments for Greece (6.5 billion). 21 November Ireland controversially accept an EU-IMF multi-billion euro package to help alleviate its debt burden. 22 November Following the withdrawal of the Irish Green Party from the governing coalition, a new election is called. 2011 January 2011 Fitch becomes the third rating agency to cut Greek debt to "junk" status after S&P and Moody's. 23 May Greece unveils a series of privatizations, part of a goal to raise 50 billion by 2015 to pay down its debt mountain. 15 June Waiting from both markets and the Greek population turned violent. The failure of European leaders to resolve their disagreements over the Greek debt crisis combined to rattle credit markets. 18 August The European stock markets suffered further heavy falls due to persistent fears about the world economic outlook.

24 August The French government unveiled a 12 billion deficit cutting package that raised taxes on the rich and closed some tax loopholes. 13 September An international alarm over a Euro-zone crisis grows. 21 September S&P have downgraded seven Italian banks after they've dropped Italy's sovereign rating two days ago. 22 September Greeks reacted with anger and disbelief at a new wave of austerity cuts enacted to keep the country in the Euro-zone. 28 October The head of the Euro-zone's bailout fund has begun attempts to persuade the People's Republic of China to invest in a scheme to help rescue member countries facing debt crises. 1 November - The Greek PM Papandreou has announced a referendum on the new Euro-zone debt deal which shocked European markets and had thrown the future of the euro back into disarray. 3 November - Prime Minister Papandreou withdraws from promised Greek referendum on the bailout package amid heavy pressure from Germany and France. 13 November - Silvio Berlusconi resigns as Prime Minister of Italy as a result of the country's debt crisis. 30 November - The European Central Bank, the U.S. Federal Reserve Federal Reserve, the central banks of Canada, Japan, Britain and the Swiss National Bank provide global financial markets with additional liquidity to ward off the debt crisis and to support the real economy. The central banks agree to provide each other with abundant liquidity to make sure that commercial banks stay liquid in other currencies. 2012 13 January - Standard & Poors downgrades France and Austria from AAA rating, lowers Spain, Italy and five other euro members further, and maintains the top credit rating for Finland, Germany, Luxembourg, and the Netherlands. 29 February 2012 - The ECB holds a second auction, providing 800 Euro-zone banks with further 529.5 billion in cheap loans. 6 May - In Greek legislative election, May 2012 no party gains an overall majority, this worsens market falls. (WIKIPEDIA, 2012)

As many other financial crisis of the past, the Eurozone crisis resulted from a combination of complex factors, including the globalization of finance; easy credit conditions during the 20022008 period that encouraged high-risk lending and borrowing practices; the financial crisis of 200708; international trade imbalances; real estate bubbles that have since burst; the Great Recession of 20082012; fiscal policy choices related to government revenues and

expenses; and approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses.

Causes of Eurozone Crisis

Rising household and government debt levels In 1992, members of the European Union signed the Maastricht Treaty, under which they pledged to limit their deficit spending and debt levels. However, a number of EU member states, including Greece and Italy, were able to circumvent these rules. This allowed the sovereigns to mask their deficit and debt levels through a combination of techniques, including inconsistent accounting, off-balance-sheet transactions. The adoption of the euro led to many Euro-zone countries of different credit worthiness receiving similar and very low interest rates for their bonds and private credits during years preceding the crisis. As a result, creditors in countries with originally weak currencies (and higher interest rates) suddenly enjoyed much more favorable credit terms, which spurred private and government spending and lead to an economic boom. In some countries such as Ireland and Spain low interest rates also led to a housing bubble, which burst at the height of the financial crisis.

Figure 2Budget Deficit and Public Debt to GDP 2009

Trade imbalances

Figure 3: Current account balances relative to GDP (2010)

Commentator and Financial Times journalist Martin Wolf has asserted that the root of the crisis was growing trade imbalances. He notes in the run-up to the crisis, from 1999 to 2007, Germany had a considerably better public debt and fiscal deficit relative to GDP than the most affected Euro-zone members. In the same period, these countries (Portugal, Ireland, Italy and Spain) had far worse balance of payments positions. Whereas German trade surpluses increased as a percentage of GDP after 1999, the deficits of Italy, France and Spain all worsened. Monetary policy inflexibility Membership in the Euro-zone established a single monetary policy, preventing individual member states from acting independently. In particular they cannot create Euros in order to pay creditors and eliminate their risk of default. Since they share the same currency as their (Euro-zone) trading partners, they cannot devalue their currency to make their exports cheaper, which in principle would lead to an improved balance of trade, increased GDP and higher tax revenues in nominal terms.

Another point of view

Just as with other crisis, the view varies with different experts. Peter Praet, Member of the Executive Board of the Eurpopean Central Bank, explains the crisis by metaphorically

representing it in the form of an iceberg. According to him, it might be useful to think about the development of the global financial crisis and subsequently the euro debt crisis in the last five and a half years as the gradual discovery of an iceberg. The shape of the underwater part can be difficult to judge by looking at the section which is visible above the surface. He does this because as the crisis gradually unfolded, a chain of unexpected problems came to the surface and vulnerabilities that were previously underestimated became apparent. The Tip of the berg: Liquidity crisis

He argues that the tip of the iceberg is the liquidity crisis. Tensions in money markets erupted in August 2007 when the US mortgage market, which was at the epicentre of a complex network of financial derivative products held globally, started to un-ravel. Liquidity in interbank markets worldwide dried up as market participants became paralysed by uncertainty. The key problem was that counterparty risk which had hitherto remained limited suddenly increased in great proportions because the distribution of risk exposures to US subprime mortgage markets was markedly opaque. This led some market segments to partially freeze and others to close completely. The second layer: Lehmann Brothers The collapse of Lehman Brothers in the autumn of 2008 triggered an exceptionally abrupt repricing of risks globally. It led to a very significant intensification of the financial crisis; to a temporary freeze in trade financing and a global trade decline; to a curtailment of credit and domestic demand; and, ultimately, to a severe decline in global demand and output. The main channels through which the crisis was transmitted internationally are now relatively well understood, although the extent and strength of the interconnectedness was quite surprising in real time. Activity corrected most in countries where credit was booming prior to the crisis, with large current account deficits, high external debt and highly leveraged financial sectors, in particular.

In the euro area, a channel of particular importance was the fact that some banks had tapped US wholesale funding markets in large amounts to finance their activities. Some of these

banks were in addition as heavily involved as US banks in the production of allegedly riskfree securities, such as asset-backed commercial paper, that aimed to meet the needs of US money markets funds. They were severely hit when these markets froze. Moreover, although the euro areas current account was broadly balanced, it still had significant gross external assets and liabilities vis--vis the US, which acted as a powerful conduit of the crisis. This led to a loss of confidence in the market.
Loss of confidence

Prior to development of the crisis it was assumed by both regulators and banks that sovereign debt from the Euro-zone was safe. Banks had substantial holdings of bonds from weaker economies such as Greece which offered a small premium and seemingly were equally sound. As the crisis developed it became obvious that Greek, and possibly other countries', bonds offered substantially more risk. Contributing to lack of information about the risk of European sovereign debt was conflict of interest by banks that were earning substantial sums underwriting the bonds. The loss of confidence is marked by rising sovereign CDS prices, indicating market expectations about countries' creditworthiness. (WIKIPEDIA, 2012) Third layer: Sovereign debt crisis Challenges became more intricate still when the third layer of the iceberg the sovereign debt crisis surfaced towards the end of 2009. Risk re-pricing intensified, spreading from banks to sovereigns and back to banks in an adverse feedback loop, and interacted with existing but previously hidden vulnerabilities in several euro area countries. This feedback loop included three separate ingredients. First, the solvency of some banks was strained by significant exposures to domestic sovereign debt and write-offs or declines in the market value of government bonds that eroded their capital.

Figure 4Convergence in Inflation rates and Long term Bond Yields (Lin & Treichel, 2013)

Second, declines in the market value of government bonds led to liquidity strains, insofar as these bonds are widely used as collateral in interbank markets. Third, in some instances, governments had to step in to recapitalise vulnerable domestic banks, thereby increasing their own debt in turn.

This tale of two debt overhangs, as some have called this twin crisis of banks and sovereigns, had uneven effects across euro area countries. Some countries were markedly more affected than others, which contributed to increased financial fragmentation in the euro area.
Structural problem of Euro-zone system

The above mentioned problems also laid bare further fragilities that had been accumulated in the past, including the fact that some euro area countries had neglected structural reforms and as a result faced competitiveness losses and the built-up of external deficits. There is a structural contradiction within the euro system, namely that there is a monetary union (common currency) without a fiscal union (e.g., common taxation, pension, and treasury functions). In the Euro-zone system, the countries are required to follow a similar fiscal path, but they do not have common treasury to enforce it. That is, countries with the same monetary system have freedom in fiscal policies in taxation and expenditure. This feature brought fiscal free riding of peripheral economies, especially represented by Greece, as it is hard to control and regulate national financial institutions. Furthermore, there is also a problem that the euro zone system has a difficult structure for quick response. Euro-zone, having 17 nations as its members, require unanimous agreement for a decision making

process. This would lead to failure in complete prevention of contagion of other areas, as it would be hard for the Euro-zone to respond quickly to the problem. While these fragilities had not gone completely unnoticed, and had been pointed out early on by the ECB, they had not received the attention they deserved until the crisis struck. This bears similarities with the Asian financial crisis, which is well remembered in this part of the world. Some experts saw it coming and warned at an early stage against the causes that led to it, such as short-term financing in foreign currency of long-term investments ( maturity mismatch) and insufficient prudential standards leading to excessive risk taking and rent seeking behaviour. Unfortunately the warnings were not taken seriously until the issues and risks materialised first with the depreciation of the Thai baht in July 1997. The last layer: Redenomination risk As growing financial market tensions made the financing of these deficits ever more difficult, the last and most unexpected layer of the iceberg namely the so-called redenomination risk, the possibility of a break-up of the euro area came to the surface in the middle of last year. By that time, the sovereign spread of high-yield euro area countries relative to other euro area countries had widened to an exceptional extent, hardly justified by fundamentals and fundamentally incompatible with a well-functioning monetary union. This led to the announcement by the ECB of the modalities for Outright Monetary Transactions (OMT), which helped to remove redenomination risk. (Praet, 2013)

In the year 2008, the global economy was hit by one of the worst financial crisis, unprecedented in history. It was triggered by the sub-prime crisis in the US. Even before the world could recover completely, the Euro zone crisis has hit the global economy. The crisis is already having an impact on the world order. As of now, no one really knows how long the crisis will continue, and the damage it will do to global economies. Portugal, Ireland, Italy, Greece and Spain have huge debt-GDP ratios and unsustainably huge fiscal deficits. We wanted to see which key indicators are the best for comparing Europe and might help us understand what's going on a little better. 1. Government debt These are the big scary numbers - although it's still regularly mixed up with the deficit (see below) by journalists and politicians alike. As a whole, Europe owes 10,840,197,700,000 or 10.84 trillion. But it's more meaningful to look at the number as a percent of gross domestic product, or GDP. So, we want to see how much that debt is as a proportion of the whole economy - kind of equivalent to measuring your mortgage compared to the whole economic value of your household. That gives us a European average of 84.9% in the second three months of this year - up from 83.4% in the first quarter. Greece, at the top, owes 144.3%, up from 132.3% (although it has seen big GDP drops over the same period), followed by Italy at 126.1%. The UK is just above average at 86%. (Rogers & Murdoch, 2012)

Figure 5 Government debt (% of GDP) 2. Deficits If the gross debt is equivalent to your mortgage, the deficit is the overdraft, the running gap between your outgoings and in-goings. Big deficits mean more borrowing, and then running it up all over again to cover the costs of that borrowing. Again, the best way to look at these is as a percentage of GDP, and Eurostat shows which countries are worst affected with the data from 2011. It shows Ireland had the worst deficit then at 13.4% followed by Greece and Spain, both at 9.4%. Compare that to Germany at 0.8% and we can see the relative strengths of the economies.

Figure 6: Government deficit (red) or surplus (blue) in 2011 (in % of GDP)

3. Is Europe still in recession? If we look at changes in GDP - these figures are from the OECD - it does show things have improved considerably since early 2009, although growth rates have hovered around zero in the last couple of years. The UK had climbed out of recession.

Figure 7 GDP change 4. Bond yields The way governments borrow money is by selling bonds - the interest rate, or "yield", is set when the debt is auctioned. This matters because as a country the higher the rate you have to sell your bonds at, the more you'll have to pay back. In short, the lower the figure the better. As we can see from the chart below, the UK, outside the Euro, is benefiting from being a safe haven. At the other end of the spectrum, Greece and Portugal are considered less safe than Romania and Cyprus.

Figure 8 10 year bond yield 5. Unemployment Unemployment is the indicator with the most direct impact on real people's lives of those here. Traditionally, when there's a recession, unemployment lags behind i.e., it goes up at the end of the recession and takes a while to come down again. This recession has not seen huge changes in overall unemployment yet, although the last year has seen a gradual rise.

Figure 9 Unemployment

Youth unemployment has gone up too - but the percentages are even more striking: 54.2% of 15-24-year-olds in Spain are unemployed, for instance.

Figure 10 Youth unemployment

Impact on Asia
The Eurozone crisis impacts Asia through three major channels: the trade, financial, and remittances channels. Trade Channel Both regions are important trading partners of each other. According to data by the European statistical agency, in 2011, goods originating in Asia comprised 31.5% of the euro area's total imports, while 23.5 per cent of the euro area's total exports were destined to Asia (Eurostat, 2012). Asias exports would therefore be adversely affected by falling demand for foreign goods and services in Europe, resulting from an uncertain business environment and the implementation of austerity measures. But according to IMF data, developing Asias trade has diversified quite significantly in recent years: while the share of intra-regional trade has increased significantly, the share of the US has fallen sharply to about 13 per cent while that of the eurozone has remained more or less unchanged at around 10 per cent (Figure 1). The increasing level of intra-regional trade would have provided additional resilience to Asia from external shocks emanating from both the eurozone and the US.

Data in Figure lends some support to above expectation. According to Eurostat data, the eurozones imports from Asia fell quite sharply in late 2008 and throughout 2009 reflecting the adverse impact of the global economic crisis. Since then it has recovered and even exceeded the pre-crisis level. After April 2012, however, some softening of the eurozones imports from Asia can be witnessed. A prolonged recession in the eurozone will pose a serious threat to the export-oriented countries in Asia such as China, Korea, Malaysia, Philippines, Singapore, Sri Lanka, and Thailand. Massa et al (2009) indicate that countries pegging to the US dollar such as Vietnam, Bangladesh, and Sri Lanka could experience an appreciation of their currencies and thereby lose export competitiveness as the euro weakens. Countries with stronger domestic demand (such as Indonesia) will obviously be less affected. Financial Channel The second channel through which the eurozone crisis could be transmitted to Asia is the financial channel that is, through the impact on FDI inflows, bank lending, and remittance flows from Europe to Asia. Data on FDI outflows from the EU to the world are available from the Eurostat until 2010 (Table 1). These data show that FDI outflows from the EU fell sharply by over 60 per cent during the period 2008 to 2010, from euro 383.5 billion to 145.6 billion. FDI inflows to Asia also fell during this period. Among the Asian countries, Singapore, China, Hong Kong, India,

and Japan are the largest recipients of FDI from the EU. These suggest that EU FDI in Asia was rebounding quite strongly.

Using data from the Bank for International Settlements and CEIC, the ADB has estimated the exposure of Asian countries to banks in the US and Europe in 2011 (Table 2). These estimates suggest that Asian countries are more exposed to banks in Europe than banks in the US. Asian countries could therefore be seriously affected through this channel. (Rana & Blomenhofer, 2013)

In terms of exposure to European banks, Singapore tops the list with consolidated European bank claims amounting to 71.4 per cent of total domestic credit, followed by Hong Kong (69.6 per cent), India (17.3 per cent), Kazakhstan (17.0 per cent), the Philippines (15.1 per cent), Malaysia (14.9 per cent), and Indonesia (12.1 per cent). Towards the bottom of the list are Japan (2.3 per cent) and the China (2.6 per cent).

The impact of the eurozone crisis on lending activities of European financial institutions is visible, but the effects have not yet been very pronounced. Mathur (2012) has estimated that in the final quarter of 2011, European banks cut back on their lending to Asia by US $40 billion, but this is relatively small compared to the US$ 220 billion that was pulled out of the region during the period of June-September 2008 at the time of the global economic crisis. Deleveraging by European banks could accelerate if the eurozone crisis deepens. The Economist magazine (2012) has commented that the decrease in European bank lending to Asia has been partially offset by increased activity of Japanese banks in the region, but the services provided by European banks cannot easily be replaced. European banks provide close to a third of the regions trade and project finance and have an edge in sophisticated finance methods that Japanese banks lack. Asias regional financial hubs are likely to be most vulnerable to reduced European bank activity. Remittances With global remittances flows to developing countries having reached a record level of US$ 300 billion, the potential impact of this channel cannot be underestimated (Lacalle, 2012). Figure 3 shows that after registering a very sharp increase (of 29 per cent) in 2007, the growth of outward remittances from the eurozone has softened considerably with absolute declines in 2009 and 2010. Data on remittance flows from the eurozone to Asia are not available, but it is reasonable to expect a similar trend. Countries such as Bangladesh, Cambodia, Kyrgyz Republic, Nepal, Philippines, and Tajikistan could therefore have been adversely affected. However, since remittances are relatively inelastic to short-term shocks, it is possible that the adverse impact could be realized only in the longer term.

Figure 11 Eurozone outward remittances (annual percentage change)

The Implemented Remedies A European fiscal union was a major lack of the Euro integration plan. If established, this union will be able to exert the control over fiscal policies of member nations which should have come with the cheap credit and Euro. Control, including requirements that taxes be raised or budgets cut, would be exercised only when fiscal imbalances developed.
European bank recovery and resolution authority

European banks are estimated to have incurred losses approaching 1 trillion between the outbreak of the financial crisis in 2007 and 2010. The European Commission approved some 4.5 trillion in state aid for banks between October 2008 and October 2011, a sum which includes the value of taxpayer-funded recapitalizations and public guarantees on banking debts. This has prompted some economists such as Joseph Stiglitz and Paul Krugman to note that Europe is not suffering from a sovereign debt crisis but rather from a banking crisis.
Eurobonds

On 21 November 2011, the European Commission suggested that eurobonds issued jointly by the 17 euro nations would be an effective way to tackle the financial crisis. Using the term "stability bonds", Jose Manuel Barroso insisted that any such plan would have to be matched by tight fiscal surveillance and economic policy coordination as an essential counterpart so as to avoid moral hazard and ensure sustainable public finances.
European Monetary Fund

On 20 October 2011, the Austrian Institute of Economic Research published an article that suggests transforming the EFSF into a European Monetary Fund (EMF), which could provide governments with fixed interest rate Eurobonds at a rate slightly below medium-term economic growth (in nominal terms). These bonds would not be tradable but could be held by

investors with the EMF and liquidated at any time. To ensure fiscal discipline despite lack of market pressure, the EMF would operate according to strict rules, providing funds only to countries that meet fiscal and macroeconomic criteria. Governments lacking sound financial policies would be forced to rely on traditional (national) governmental bonds with less favorable market rates.
Drastic debt write-off financed by wealth tax

To reach sustainable levels the Euro-zone must reduce its overall debt level by 6.1 trillion. According to BCG this could be financed by a one-time wealth tax of between 11 and 30 percent for most countries, apart from the crisis countries (particularly Ireland) where a writeoff would have to be substantially higher. The authors admit that such programs would be "drastic", "unpopular" and "require broad political coordination and leadership" but they maintain that the longer politicians and central bankers wait, the more necessary such a step will be.

Concluding Remarks
Overall, it seems that that the Euro-zone crisis is a combination of irresponsible behavior and free-riding, maxed out to a macroeconomic level. As Douglas McGregor assumed in the case of management that employees are lazy and they dislike work, it seems proven by the euro crisis that when acting as a part of mass public, human beings behave irresponsibly, leading life less carefully and enjoying more than they ought to. Had there been a tight leash around countries, a monitoring and controlling mechanism that would work, the worst of the crisis could be avoided.

Works Cited
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