Which of the following is the best explanation of why the Euro-zone debt crisis

Question

Which of the following is the best explanation of why the Euro-zone debt crisis is most severe Portugal, Ireland, Greece, and Spain? All these countries: (a) had large government budget deficits and public debts even before the financial crisis, and then their deficits and debt grew even larger. (b) had large inflows of capital, so their economies depended on borrowing from other countries, but the financial crisis caused these foreign sources of credit to dry up. (c) were in recession even before the financial crisis, and then they went into depression following the financial crisis. (d) have been forced out of the Euro zone and now their economies are having a hard time switching back to their national currencies.

Explanation / Answer

Option (a).

At beginning of formation of Euro zone, the Maastricht Treaty which set out the rules for membership had certain criteria stated in terms of allowable levels of budget deficit and public debt as % of GDP for each prospective member. But the stated 4 countries didn't conform to the specified rules and joined Euro zone with already-weakened deficit and debt situation. Their situations went more critical as time passed, and finally their debt spirals affected the Eurozone itself.

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.