By Prof. Dr. Sri Adiningsih, M.Sc. and Rosa Kristiadi M.Comm

European economic crisis which begun in 2010 shows no signs of abating.  The ongoing economic crisis  in the Eurozone  region  is attributable to the large public debt , which started to emerge in 2000, reflected in  a significant increase in the  ratio of government debt. In 2000, the ratio of government debt for Greece was just 77% of GDP,   but in 2012 it had surged to 170%. IMF predicts that Greece debt ratio will rise above 180% in 2013, due to the widening budget deficit. Such a condition is very much in contrast to Maastricht Treaty rules that impose maximum limit of 60% on the country’s debt to GDP ratio and a deficit of 3 % of GDP.  The theory is that economic uncertainty in the regional economy is unavoidable if the two ratios go beyond the maximum limits imposed

To aggravate the situation, the debt crisis has now spread to other countries in the European Region such as Ireland, Portugal, Italy, Spain, and even France. Ireland today has a ratio of government debt to GDP of 103%, which is in contrast to 36% in 2000. Portugal, which in 2012 had a debt ratio of 113%, based on IMF predictions will surge to 119% in 2013. Consequently, the large debt overhang facing Eurozone countries such as Greece, Portugal, and Ireland, has hampered their capacity to repay their debt obligations, causing an economic crisis in the European economic region.

Eurozone leadership has taken some measures tailored to overcoming the debt crisis. One of the key policy measures  was the formation of the European Stability Mechanism (ESM) on  27 September 2012, which was been charged with the task of providing  bailout funds to members of the  Eurozone that face financial difficulties, facilitated by the  Troika (International Monetary Fund, European Central Bank and the  European Comission). In addition, Eurozone countries reached agreement on increasing money in  bailout fund from  500 billion Euros to  800 Euros or about  USD 1trillion. The standby fund is aimed at not only assisting Eurozone members that face financial crisis  such as Greece, Ireland, and Portugal to overcome  such a problem, but also anticipated members that may need bailout funds from  ESM.
Another policy that was implemented in order to overcome debt crisis in Europe, was the imposing of haircut on Greek government bonds for the private sector. Banks and insurance reached an agreement that in effect reduced the value of their Greek government bonds by 50%.  The reduction in the value of Greek debt obligations to the private sector was not only important from the vantage point of saving the country from the possibility of default, but also the entire European region.

Direct recapitalization of banks, was another measure which European Union leadership took. The troubled banking sector of any country within the Eurozone, could receives direct bail out fund from European bailout fund. To that end, the Eurozone reached an agreement that in effect will unify the supervision of banks in member countries. That way, the bailout of banks in Eurozone member countries will not add to the already large government debt.  

Additionally, the Greece bailout fund amounting to USD 56 billion finally approve by IMF and Eurozone’s minister of finance after going through a long debate. The Eurozone leader hopes that their policies will be able to protect Greece as well as Eurozone from further crisis.

Nonetheless, the still large public debt in European member countries and sluggish progress of economic reforms, have reduced the impact of the realization of the desired effect on the economy. On the contrary,   worsening economic conditions in some European Union member countries has induced credit rating agencies downgraded government debt for  some Eurozone member nations.  Moody’s rating of Germany government debt, though confirmed its AAA rating,  slapped a negative outlook. Meanwhile, recently,  S&P downgraded Greek government debt to Selective Dafault.  The above developments underscore the fact that economic crisis in Europe is still raging.

Thus, developments in Europe to this day, have not yet to produce sufficient confidence that the European crisis will be overcome any time soon.  Various efforts have been made to overcome the economic crisis which has been roiling Europe since 2010, but as yet certainty of the European Union remain as elusive as ever. This is compounded by the slow pace of economic reforms.  As if all the above problems are not worrying enough, there are signs that United Kingdom may exit the European Union. However, what underscores is that the only way   European union will be to solve all the host of problems it faces today.  To that end, there is little doubt that uncertainty emanating from European Union will to a large continue to influence the direction and pace of the world economy in  2013.