1. What kind of divisions (cleavages) can we find between northern and
southern countries in the Eurozone? Explain.
In first place, there is an economic division. The northern countries in Europe
(Germany, Netherlands or Finland) have not suffered the same effects of the crisis as the
southern countries. While the southern countries have been experiencing
unemployment, high interest rates and economic recessions; the northern countries have
not suffered these effects at all.
In second place, there is an analysis division. The northern countries consider that the
crisis has be caused by the southern countries behavior, acting irresponsibly because
they considered that their decisions were going to be backed by the European
institutions. Nevertheless, the southern countries interpret that the northern countries
have been pressing their economies with hard austerity programs, what could have
make their recovery worse.
2. What are the financial crisis and the sovereign crisis? How are the financial
crisis and sovereign crisis connected? That is, what caused the increase in
public debt?
A financial crisis is a situation in which the value of financial institutions or assets drop
rapidly. In our case, this was triggered by the bursting of the housing bubble. Banks also
stopped lending one another: credit crunch.
A sovereign crisis is a situation in which, the countries that are trying to finance their
economies through the bonds market lose the confidence of the investors because of
uncertainty. At this point, where countries need money to balance their budgets and the
investors find risky to lend the money, the only solution is that countries raise the
interest rates with the purpose of making their bonds more attractive for investors.
Nevertheless, it could arrive a moment when countries could not pay the bond interests,
and this is what we call a sovereign crisis.
There is a nexus between both crisis. Firstly, it always occurred the financial crisis,
when banks bankrupt and what make the governments of the different countries to cover
their debts because of the importance of banks on an economy. Because of this, the
governments need money to cover the debts so it returns to the bonds market. The
financial crisis has shown investors the uncertainty and instability of the country, so
they only invest on bonds if they receive high interest rates; interest rates that may
could not be paid by the countries, not getting financing and achieving a sovereign
crisis.
The needs of rescuing banks in 2007 made that governments had to offer higher interest
rates to investors to receive financing, so the public debt increased considerably.
3. What side effects could austerity have on the economy?
