International Politics Essay Euro Debt Crisis 2

International Politics Essay Euro Debt Crisis 2 -...

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International Politics 1936337 European Debt Crisis Section 003 Origin of the Problem In January 1999, the member countries of the European Union adopted a common currency that, if successful, would result in a stabilized monetary arrangement and low inflation. What’s more, a common European Central Bank would manage monetary policies and work towards economic cooperation and prosperity. For that reason, poorer countries like Greece that were weary from high inflation, readily relinquished monetary responsibilities to the ECB. Because Greece and these countries were able to “borrow money at the same interest rates as rich and financially prudent Germany,” they had an incentive to borrow and spend as they pleased, in turn creating huge deficits (Marsh “An Overview of the Euro Crisis”). They did so anticipating that the other members of the EU, specifically Germany and France, would cover their debt or risk economic turbulence. This is an example of a collective action problem, for while each member country had an incentive to collaborate by spending and borrowing responsibly, Greece and countries in the same economic situation defected, by free riding and expecting Germany and France to pay the costs of cooperation (FLS 56). Nature of the shared and conflicting interests Focusing on present day Greece, there are three courses of action Greece can undertake with respect to its debt crisis: default, receive a bailout or receive a bailout and implement austerity programs. The members of the EU, including Greece and especially Germany and France, are opposed to Greece defaulting because they seek monetary and economic stability. If Greece were to default, German and French banks that have heavily invested in bonds issued by Greece and other debt-ridden countries like Italy, would lose even more money and eventually need government bailouts themselves, burdening German and French taxpayers. And because German and French banks are globally tied, other
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This note was uploaded on 04/03/2012 for the course POLS 110 taught by Professor Davis during the Fall '08 term at Emory.

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International Politics Essay Euro Debt Crisis 2 -...

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