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Tuesday, March 6, 2012

The Eurozone Crisis: Overview and Issues for Congress

Rebecca M. Nelson, Coordinator
Analyst in International Trade and Finance

Paul Belkin
Analyst in European Affairs

Derek E. Mix
Analyst in European Affairs

Martin A. Weiss
Specialist in International Trade and Finance

What started as a debt crisis in Greece in late 2009 has evolved into a broader economic crisis in the Eurozone that threatens economic stability in Europe and beyond. Some analysts view the Eurozone crisis as the biggest potential threat to the U.S. economic recovery. The Eurozone faces at least four major, and related, economic challenges. These challenges include: 1) high debt levels and public deficits in some Eurozone countries; 2) weaknesses in the European banking system; 3) economic recession and high unemployment in some Eurozone countries; and 4) persistent trade imbalances within the Eurozone.

European leaders have undertaken several rounds of unprecedented policy measures to resolve the crisis. Key policy measures focus on: austerity measures and structural and economic reforms in countries facing severe market pressure, including Greece, Ireland, Italy, Portugal, and Spain (often referred to as the Eurozone “periphery”); financial assistance from other Eurozone governments and the IMF to Greece, Ireland, and Portugal; plans for debt restructuring in Greece; European Central Bank (ECB) liquidity support to private banks and purchases of sovereign bonds on secondary markets; and a commitment by most countries in the European Union (EU) to balance national budgets, the so-called “fiscal compact.”

Although the ECB’s infusion of cash into the banking system in December 2011 and February 2012 through long-term refinancing operations appears to have calmed markets, significant risks and policy questions remain. Particular concerns center on how to restore growth in the Eurozone periphery amidst often unpopular austerity reforms; how to put Greece’s debt on a sustainable path; and how to correct trade imbalances in the Eurozone. More broadly, there are questions about the impact of the crisis on the future of the Eurozone. Some economists are optimistic that ultimately the European leaders and institutions will do whatever is necessary to keep the Eurozone from collapsing, and that the Eurozone will emerge from the crisis stronger and more integrated. Others view a broader financial crisis triggered by a disorderly default or exit by one or more countries from the Eurozone as a real possibility.

Date of Report: February 29, 2012
Number of Pages: 23
Order Number: R42377
Price: $29.95

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