Divided Europe

Europe had always been a

continent of trade barriers,
tariffs and different
currencies
After the World War II, in
order to rebuild Europe,
different European countries
began removing trade
barriers
This gave birth to the idea of
a united Europe and thus 27
countries signed the
Maastricht Treaty on 7
th
Feb
1992 to form the European
Union
Adoption of the Euro
But the problem of
different currencies was
still hampering trade
High exchange fees were a
major barrier and resulted
in high operating margins
for businesses across the
continent
Thus, in order to eliminate
these deterrents the Euro
was adopted as the common
currency on Jan 1, 1999

Start of the Crisis - Monetary
Policy vs Fiscal Policy
Monetary policy governs how much money is there and
what would be the borrowing or lending rates
Fiscal policy governs how much a government collects in
taxes and how much it spends. A government can spend
only as much as it earns in taxes, the rest it has to borrow.
This is known as Deficit Spending
With the adoption of the Euro, the member countries
shunned their individual monetary policies
The European Central Bank was established which
governed a single monetary policy for all the member
countries. But, the members continued with their
individual fiscal policies

Start of the Crisis The
Borrowing Spree
Greece, which could earlier borrow at rates as high
as 18%, was now able to secure loans at only 3%
This was possible because of the common Euro
credit card.
Banks perceived that even if Greece defaults, the
larger economies like Germany and France would
pay up the debt
In 2008, hit by the worldwide recession, Greece
began defaulting on its payments