The global financial crisis was caused by a large increase in savings from 2000-2007 that sought higher yields than US Treasury bonds, generating asset bubbles around the world. When the bubbles burst, governments and banks faced questions about their solvency as asset prices fell but debt levels remained. This interconnected the global financial system and risk of default by one country threatened others through trade links and credit default swaps. The eurozone crisis emerged from these conditions and was exacerbated by fiscal issues in Greece and other countries that masked their debt levels. Rising government debt and loss of confidence in sovereign debt further drove the crisis.

3. the crisis begins with the significant increase in savings available for investment during
the 2000–2007 period. During this time, the global pool of fixed income securities
increased from approximately $36 trillion in 2000 to $70 trillion by 2007. This "Giant
Pool of Money" increased as savings from high-growth developing nations entered
global capital markets. Investors searching for higher yields than those offered by U.S.
Treasury bonds sought alternatives globally. The temptation offered by this readily
available savings overwhelmed the policy and regulatory control mechanisms in country
after country as global fixed income investors searched for yield, generating bubble after
bubble across the globe. While these bubbles have burst causing asset prices
(e.g., housing and commercial property) to decline, the liabilities owed to global
investors remain at full price, generating questions regarding the solvency of
governments and their banking systems.

4. How each European country involved in this crisis borrowed and invested the money
varies.
For example:
Ireland's banks lent the money to property developers, generating a massive property
bubble. When the bubble burst, Ireland's government and taxpayers assumed private
debts.
In Greece, the government increased its commitments to public workers in the form of
extremely generous pay and pension benefits.
Iceland's banking system grew enormously, creating debts to global investors
("external debts") several times GDP.

5. The interconnection in the global financial system means that if one nation defaults on
its sovereign debt or enters into recession that places some of the external private debt
at risk as well, the banking systems of creditor nations face losses.
For example:
in October 2011 Italian borrowers owed French banks $366 billion (net). Should Italy
be unable to finance itself, the French banking system and economy could come under
significant pressure, which in turn would affect France's creditors and so on. This is
referred to as financial contagion.
Further creating interconnection is the concept of debt protection. Institutions entered
into contracts called credit default swaps (CDS) that result in payment should default
occur on a particular debt instrument (including government issued bonds). But, since
multiple CDS can be purchased on the same security, it is unclear what exposure each
country's banking system now has to CDS.
in insurance you can insure only that thing which you own, but in case of cds you
can insure something which is owned by someone else there by creating multiple
insurance on one thing. Thus loss of that one thing will result in claim by many
creating pressure on insurer.

6. Some politicians, notably Angela Merkel, have sought to attribute some of the blame for
the crisis to hedge funds and other speculators stating that "institutions bailed out with
public funds are exploiting the budget crisis in Greece and elsewhere―.
Rising government debt levels
In 1992 members of the European Union signed the Maastricht Treaty, under which they
pledged to limit their deficit spending and debt levels. However, a number of EU member
states, including Greece and Italy, were able to circumvent these rules and mask their
deficit and debt levels through the use of complex currency and credit derivatives
structures. The structures were designed by prominent U.S. investment banks, who
received substantial fees in return for their services and who took on little credit risk
themselves thanks to special legal protections for derivatives counterparties.

7. A number of "appalled economists" have condemned the popular notion in the media
that rising debt levels of European countries were caused by excess government
spending. According to their analysis increased debt levels are due to the large
bailout packages provided to the financial sector during the late-2000s financial
crisis, and the global economic slowdown thereafter.
The average fiscal deficit in the euro area in 2007 was only 0.6% before it grew to
7% during the financial crisis. In the same period the average government debt rose
from 66% to 84% of GDP.
The authors also stressed that fiscal deficits in the euro area were stable or even
shrinking since the early 1990s. US economist Paul Krugman named Greece as the
only country, where fiscal irresponsibility is at the heart of the crisis.(see the
graph)
Either way, high debt levels alone may not explain the crisis. According to The
Economist Intelligence Unit, the position of the euro area looked "no worse and in some
respects, rather better than that of the US or the UK." The budget deficit for the euro
area as a whole is much lower and the euro area's government debt/GDP ratio of
86% in 2010 was about the same level as that of the US.

8. Greece's debt percentage between 1999 and 2010 compared to the average of
the eurozone

9. Trade imbalances
Commentators such as Financial Times journalist Martin Wolf have asserted
the root of the crisis was growing trade imbalances. He notes in the run-up
to the crisis, from 1999 to 2007, Germany had a considerably better public debt
and fiscal deficit relative to GDP than the most affected eurozone members. In
the same period, these countries (Portugal, Ireland, Italy and Spain) had far
worse balance of payments positions. Whereas German trade surpluses
increased as a percentage of GDP after 1999, the deficits of Italy, France
and Spain all worsened.
More recently, Greece's trading position has improved; in the period November
2010 to October 2011 imports dropped 12% while exports grew 15% (40% to
non-EU countries in comparison to October 2010).

10. Monetary policy inflexibility
Since membership of the eurozone establishes a single monetary policy
individual member states can no longer act independently. Paradoxically, this
situation creates a higher default risk than faced by smaller non-eurozone
economies, like the United Kingdom, which are able to "print money" in
order to pay creditors and ease their risk of default. (Such an option is not
available to a state such as France.) By "printing money" a country's currency
is devalued relative to its (eurozone) trading partners, making it exports
cheaper, in principle leading to an improving balance of trade, increased GDP
and higher tax revenues in nominal terms. In the reverse direction
moreover, assets held in a currency which has devalued suffer losses on the
part of those holding them. For example by the end of 2011, following a 25
percent fall in the rate of exchange and 5 percent rise in inflation, eurozone
investors in Sterling, locked in to Euro exchanges rates, had suffered an
approximate 30 percent cut in the repayment value of this debt.

11. Loss of confidence
Prior to development of the crisis it was assumed by both regulators and banks that
sovereign debt from the eurozone was safe. Banks had substantial holdings of bonds
from weaker economies such as Greece which offered a small premium and seemingly
were equally sound.
As the crisis developed it became obvious that Greek, and possibly other
countries', bonds offered substantially more risk. Contributing to lack of information
about the risk of European sovereign debt was conflict of interest by banks that were
earning substantial sums underwriting the bonds. The loss of confidence is marked
by rising sovereign CDS prices, indicating market expectations about countries'
creditworthiness (see graph).

12. Sovereign CDS prices of selected European countries (2010–2011). The left axis is in basis
points; a level of 1,000 means it costs $1 million to protect $10 million of debt for five
years.

13. Furthermore, investors have doubts about the possibilities of policy makers to
quickly contain the crisis. Since countries that use the Euro as their currency have
fewer monetary policy choices (e.g., they cannot print money in their own currencies to
pay debt holders), certain solutions require multi-national cooperation. Further, the
European Central Bank has an inflation control mandate but not an employment
mandate, as opposed to the U.S. Federal Reserve, which has a dual mandate.
According to the Economist, the crisis "is as much political as economic" .

14. Rating agency views
On December 5, 2011 S&P placed its long-term sovereign ratings on 15 members of the
eurozone on "CreditWatch" with negative implications; S&P wrote this was due to
"systemic stresses from five interrelated factors:
1) Tightening credit conditions across the eurozone;
2) Markedly higher risk premiums on a growing number of eurozone sovereigns
including some that are currently rated 'AAA';
3) Continuing disagreements among European policy makers on how to tackle the
immediate market confidence crisis and, longer term, how to ensure greater
economic, financial, and fiscal convergence among eurozone members;
4) High levels of government and household indebtedness across a large area of the
eurozone; and
5) The rising risk of economic recession in the eurozone as a whole in 2012.
Currently, we expect output to decline next year in countries such as Spain, Portugal
and Greece, but we now assign a 40% probability of a fall in output for the eurozone
as a whole."

16. In the early-mid 2000s, Greece's economy was strong and the government took
advantage by running a large deficit, partly due to high defense spending amid historic
enmity to Turkey. As the world economy cooled in the late 2000s, Greece was hit
especially hard because its main industries—shipping and tourism—were
especially sensitive to changes in the business cycle. As a result, the country's debt
began to pile up rapidly. In early 2010, as concerns about Greece's national debt
grew, policy makers suggested that emergency bailouts might be necessary.
On 23 April 2010, the Greek government requested that the EU/IMF bailout
package be activated, with an initial loan package of €45 billion ($61 billion). A few
days later Standard & Poor's slashed Greece's sovereign debt rating to BB+ or
"junk" status amid fears of default, in which case investors were thought to lose 30–
50% of their money. Stock markets worldwide and the Euro currency declined in
response to this announcement.

17. On 1 May 2010, the Greek government announced a series of austerity measures to
persuade Germany, the last remaining holdout, to sign on to a larger EU/IMF loan
package. The next day the eurozone countries and the International Monetary Fund
agreed to a three year €110 billion loan retaining relatively high interest rates of
5.5%, conditional on the implementation of harsh austerity measures. Credit rating
agencies immediately downgraded Greek governmental bonds to an even lower
junk status. This was followed by an announcement of the ECB on 3 May that it will still
accept as collateral all outstanding and new debt instruments issued or guaranteed by
the Greek government, regardless of the nation's credit rating, in order to maintain
banks' liquidity. The new austerity package was met with great anger by the Greek
public, leading to massive protests, riots and social unrest throughout Greece. On 5
May 2010, a national strike was held in opposition to the planned spending cuts and tax
increases. In Athens some protests turned violent, killing three people.

18. still €110 billion loan did not help as it was found that the process of re-establishing
Greek access to private capital markets by 2012, would take even much longer.
The November 2010 revisions of 2009 deficit and debt levels made accomplishment of
the 2010 targets even harder, and indications signaled a recession harsher than
originally feared. In May 2011 it became evident that due to the severe economic crisis
tax revenues were lower than expected, making it even harder for Greece to meet its
fiscal goals.
Following the findings of a bilateral EU-IMF audit in June, which called for even further
austerity measures, Standard and Poor's downgraded Greece's sovereign debt rating to
CCC, the lowest in the world.
To ensure the release of the next 12 billion euros from the eurozone bail-out package
(without which Greece would have had to default on loan repayments in mid-July), the
government proposed additional spending cuts worth €28 billion over five years.

19. EU emergency measures continued at an extraordinary summit on 21 July 2011 in
Brussels, where euro area leaders agreed to extend Greek (as well as Irish and
Portuguese) loan repayment periods from 7 years to a minimum of 15 years and to cut
interest rates to 3.5%. They also approved a new €109 billion support
package, conditional on large privatization efforts. In the early hours of 27 October
2011, eurozone leaders and the IMF also came to an agreement with banks to
accept a 50% write-off of (some part of) Greek debt, the equivalent of €100 billion, to
reduce the country's debt level from €340bn to €240bn or 120% of GDP by 2020.
The unprecedented austerity measures have helped Greece bring down its primary
deficit from €24.7bn (15.8% of GDP) in 2009 to just over €5bn (9.3%) in 2011 but they
also dragged the country into five consecutive years of recession.
Industrial output is more than 28% lower than in 2005 and unemployment rates
are hitting a record high reaching almost 20 percent by 2011. Youth
unemployment reached 48%, up from 22.4% back in 2008 when the financial crisis
began. By 2011 more than a third of the nation had fallen into poverty and the
number of 111,000 Greek companies that went bankrupt was 27% higher than one
year before.

20. Some of the economic experts argued in 2010, that the best option for Greece and the
rest of the EU, would be to engineer an ―orderly default‖ on Greece’s public debt, which
would allow Athens to withdraw simultaneously from the eurozone and reintroduce its
national currency the drachma at a debased rate.
However, if Greece were to leave the euro, the economic and political impact would be
devastating. According to Japanese financial company Nomura an exit would lead to a
60 percent devaluation of the new drachma. UBS warned of
"hyperinflation, military coups and possible civil war that could afflict a departing
country".

21. In February 2012, the second bailout package from July 2011 was extended from €109
billion to €130 billion. The activation of the extended lending package was needed no
later than March 20, when a debt burden of €14.4bn had to be refinanced or paid, or
else Greece would fall into default.
There were three requirements of the package
•finalize an agreement whereby all private holders of governmental bonds would accept
a 50% haircut with yields reduced to 3.5%, thus facilitating a €100bn debt reduction for
Greece.
•Greece needed to implement another demanding austerity package in order to bring its
budget deficit into sustainable territory.
•a majority of the Greek politicians should sign an agreement guaranteeing their
continued support for the new austerity package, even after the elections in April 2012.
On February 12, amid riots in Athens and other cities that left stores looted and burned
and more than 120 people injured, the Greek parliament approved the austerity package
and the post election guarantee.

22. On 21 February 2012 the Eurogroup finalized the second bailout package. In a
marathon meeting in Brussels private holders of governmental bonds accepted a slightly
bigger haircut of 53.5% Creditors are invited to swap their Greek bonds into new 3.65%
bonds with a maturity of 30 years, thus facilitating a €107bn debt reduction for
Greece. EU Member States agreed to an additional retroactive lowering of the bailout
interest rates. Furthermore they will pass on to Greece all profits that their central banks
made by buying Greek bonds at a debased rate until 2020. Altogether this should
bring down Greece's debt to 120.5% by 2020.

23. The Irish sovereign debt crisis was not based on government over-spending, but from
the state guaranteeing the six main Irish-based banks who had financed a property
bubble. On 29 September 2008 the Finance Minister Brian Lenihan, Jnr issued a one-
year guarantee to the banks' depositors and bond-holders. He renewed it for another
year in September 2009 soon after the launch of the National Asset Management
Agency (NAMA), a body designed to remove bad loans from the six banks.
Irish banks had lost an estimated 100 billion euros, much of it related to defaulted loans
to property developers and homeowners made in the midst of the property bubble, which
burst around 2007. Ireland could have guaranteed bank deposits and let private
bondholders who had invested in the banks face losses, but instead borrowed money
from the ECB to pay these bondholders, shifting the losses and debt to its taxpayers.
The economy collapsed during 2008. Unemployment rose from 4% in 2006 to 14% by
2010, while the federal budget went from a surplus in 2007 to a deficit of 32% GDP in
2010

24. In April 2010, following a marked increase in Irish 2-year bond yields, Ireland's NTMA
state debt agency said that it had "no major refinancing obligations" in 2010. Its
requirement for €20 billion in 2010 was matched by a €23 billion cash balance, and it
remarked: "We're very comfortably circumstanced“. On 18 May the NTMA tested the
market and sold a €1.5 billion issue that was three times oversubscribed.
By September 2010 the banks could not raise finance and the bank guarantee was
renewed for a third year. This had a negative impact on Irish government
bonds, government help for the banks rose to 32% of GDP, and so the government
started negotiations with the EU, the IMF and three nations: the United
Kingdom, Denmark and Sweden, resulting in a €67.5 billion "bailout" agreement of 29
November 2010
Together with additional €17.5 billion coming from Ireland's own reserves and
pensions, the government received €85 billion, of which €34 billion were used to support
the country's ailing financial sector. In return the government agreed to reduce its budget
deficit to below three percent by 2015. In February the government lost the ensuing Irish
general election, 2011. In April 2011, despite all the measures taken, Moody's
downgraded the banks' debt to junk status.

25. In July 2011 European leaders agreed to cut the interest rate that Ireland is paying on
its EU/IMF bailout loan from around 6% to between 3.5% and 4% and to double the
loan time to 15 years. The move is expected to save the country between 600–700
million euros per year.
On 14 September 2011 the European Commission announced to cut the interest rate on
its €22.5 billion loan coming from the European Financial Stability Mechanism, down to
2.59 per cent – which is the interest rate the EU itself pays to borrow from financial
markets.
The Euro Plus Monitor report from November 2011 attests to Ireland's vast progress in
dealing with its financial crisis, expecting the country to stand on its own feet again and
finance itself without any external support from the second half of 2012 onwards.
According to the Centre for Economics and Business Research Ireland's export-led
recovery "will gradually pull its economy out of its trough". As a result of the
improved economic outlook, the cost of 10-year government bonds, which has already
fallen substantially since mid July 2011 (see the graph "Long-term Interest Rates"), is
expected to fall further to 4 per cent by 2015.

26. Long-term interest rates of all eurozone countries except Estonia (secondary
market yields of government bonds with maturities of close to ten years) A yield
of 6 % or more indicates that financial markets have serious doubts about credit-
worthiness.

27. According to A report released in January 2011 by the Diário de Notícias and published
in Portugal by Gradiva the democratic Portuguese Republic governments in the period
between 1974 and 2010
have encouraged over-expenditure and investment bubbles through unclear public-
private partnerships and funding of numerous ineffective and unnecessary external
consultancy and advisory of committees and firms. This allowed considerable slippage
in state-managed public works and inflated top management and head officer bonuses
and wages.
Risky credit, public debt creation, and European structural and cohesion funds were
mismanaged across almost four decades. The Prime Minister Sócrates's cabinet was
not able to forecast or prevent this in 2005, and later it was incapable of doing anything
to improve the situation when the country was on the verge of bankruptcy by 2011.
Robert Fishman, in the New York Times article "Portugal's Unnecessary Bailout", points
out that Portugal fell victim to successive waves of speculation by pressure from bond
traders, rating agencies and speculators. In the first quarter of 2010, before markets
pressure, Portugal had one of the best rates of economic recovery in the EU.

28. On 16 May 2011 the eurozone leaders officially approved a €78 billion bailout package
for Portugal, which became the third eurozone country, after Ireland and Greece, to
receive emergency funds. The bailout loan will be equally split between the European
Financial Stabilisation Mechanism, the European Financial Stability Facility, and the
International Monetary Fund. According to the Portuguese finance minister, the average
interest rate on the bailout loan is expected to be 5.1 percent. As part of the deal, the
country agreed to cut its budget deficit from 9.8 % of GDP in 2010 to 5.9% in
2011, 4.5 percent in 2012 and 3 % in 2013.
On 6 July 2011 the ratings agency Moody's had cut Portugal's credit rating to junk
status, Moody's also launched speculation that Portugal may follow Greece in
requesting a second bailout.
In December 2011 it was reported that Portugal's estimated budget deficit of 4.5 percent
in 2011 will be substantially lower than expected, due to a one-off transfer of pension
funds.
Despite the fact that the economy is expected to contract by 3 percent in 2011 the IMF
expects the country to be able to return to medium and long-term debt sovereign
markets by late 2013.

30. In 2010, Belgium's public debt was 100% of its GDP—the third highest in the eurozone
after Greece and Italy and there were doubts about the financial stability of the
banks, following the country's major financial crisis in 2008–2009.
However the government deficit of 5% was relatively modest and Belgian government
10-year bond yields in November 2010 of 3.7% were still below those of Ireland
(9.2%), Portugal (7%) and Spain (5.2%). Furthermore, thanks to Belgium's high personal
savings rate, the Belgian Government financed the deficit from mainly domestic
savings, making it less prone to fluctuations of international credit markets. Nevertheless
on 25 November 2011, Belgium's long-term sovereign credit rating was downgraded
from AA+ to AA by Standard and Poor and 10-year bond yields reached 5.66%.
Shortly after Belgian negotiating parties reached an agreement to form a new
government. The deal includes spending cuts and tax rises worth about €11
billion, which should bring the budget deficit down to 2.8% of GDP by 2012, and to
balance the books in 2015. Following the announcement Belgium 10-year bond yields
fell sharply to 4.6%.

31. France's public debt in 2010 was approximately U.S. $2.1 trillion and 83% GDP, with a
2010 budget deficit of 7% GDP. By 16 November 2011, France's bond yield spreads vs.
Germany had widened 450% since July, 2011. France's C.D.S. contract value rose
300% in the same period. On 1 December 2011, France's bond yield had retreated and
the country successfully auctioned €4.3 billion worth of 10 year bonds at an average
yield of 3.18 %, well below the perceived critical level of 7 %

32. Italy's deficit of 4.6% of GDP in 2010 was similar to Germany’s at 4.3% and less than
that of the U.K. and France. Italy even has a surplus in its primary budget, which
excludes debt interest payments. However, its debt has increased to almost 120 % of
GDP (U.S. $2.4 trillion in 2010) and economic growth was lower than the EU average for
over a decade. This has led investors to view Italian bonds more and more as a risky
asset. On the other hand, the public debt of Italy has a longer maturity and a big share of
it is held domestically.
About 300 billion euros of Italy's 1.9 trillion euro debt is due in 2012, so it must go to the
capital markets for significant refinancing in the near-term. On 15 July and 14
September 2011, Italy's government passed austerity measures meant to save €124
billion. Nonetheless, by 8 November 2011 the Italian bond yield was 6.74% for 10-year
bonds, climbing above the 7% level. On 11 November 2011, Italian 10-year borrowing
costs fell sharply from 7.5 to 6.7% after Italian legislature approved further austerity
measures and the formation of an emergency government to replace that of Prime
Minister Silvio Berlusconi. The measures include a pledge to raise €15 billion from real-
estate sales over the next three years, a two-year increase in the retirement age to 67
by 2026, opening up closed professions within 12 months and a gradual reduction in
government ownership of local services.

33. Spain has a comparatively low debt among advanced economies and it does not face a
risk of default. The country's public debt relative to GDP in 2010 was only 60%, more
than 20 points less than Germany, France or the US, and more than 60 points less than
Italy, Ireland or Greece.
As one of the largest eurozone economies the condition of Spain's economy is of
particular concern to international observers, and faced pressure from the United
States, the IMF, other European countries and the European Commission to cut its
deficit more aggressively.
shortly after the announcement of the EU's new "emergency fund" for eurozone
countries in early May 2010, Spain had to announce new austerity measures designed
to further reduce the country's budget deficit, in order to signal financial markets that it
was safe to invest in the country.
Spain succeeded in trimming its deficit from 11.2% of GDP in 2009 to 9.2% in 2010 and
originally expected its 2011 deficit to be at 6%. However, due to the European crisis and
over spending by regional governments, the real deficit likely overshoot the latest
target reaching between 6.6% and 8%.

34. To build up additional trust in the financial markets, the government amended the
Spanish Constitution in 2011 to require a balanced budget at both the national and
regional level by 2020.
The amendment states that public debt can not exceed 60% of GDP, though exceptions
would be made in case of a natural catastrophe, economic recession or other
emergencies.
The new conservative Spanish government led by Mariano Rajoy aims to cut the
deficit further to 4.4 percent in 2012 and 3 percent in 2013.

35. According to the Financial Policy Committee "Any associated disruption to bank funding
markets could spill over to UK banks.‖ Bank of England governor Mervyn King declared
that the UK is very much at risk from a domino-fall of defaults and called on banks to
build up more capital when financial conditions allowed. This is because the UK has the
highest gross foreign debt of any European country (€7.3 trillion; €117,580 per
person) due in large part to its highly leveraged financial industry, which is closely
connected with both the United States and the eurozone.

37. European Financial Stability Facility (EFSF)
On 9 May 2010, the 27 EU member states agreed to create the European Financial
Stability Facility, a legal instrument aiming at preserving financial stability in Europe by
providing financial assistance to eurozone states in difficulty.
Emissions of bonds are backed by guarantees given by the euro area member states in
proportion to their share in the paid-up capital of the European Central Bank. The €440
billion lending capacity of the Facility is jointly and severally guaranteed by the eurozone
countries' governments and may be combined with loans up to €60 billion from the
European Financial Stabilisation Mechanism and up to €250 billion from the
International Monetary Fund (IMF) to obtain a financial safety net up to €750 billion.
On November 29, 2011 the member state finance ministers agreed to expand the EFSF
by creating certificates that could guarantee up to 30% of new issues from troubled
euro-area governments and to create investment vehicles that would boost the EFSF’s
firepower to intervene in primary and secondary bond markets.

38. European Financial Stabilisation Mechanism (EFSM)
On 5 January 2011, the European Union created the European Financial Stabilisation
Mechanism (EFSM), an emergency funding programme reliant upon funds raised on the
financial markets and guaranteed by the European Commission using the budget of the
European Union as collateral. It runs under the supervision of the Commission and aims
at preserving financial stability in Europe by providing financial assistance to EU
member states in economic difficulty. The Commission fund, backed by all 27 European
Union members, has the authority to raise up to €60 billion and is rated AAA by Fitch,
Moody's and Standard & Poor's.
Under the EFSM, the EU successfully placed in the capital markets a €5 billion issue of
bonds as part of the financial support package agreed for Ireland, at a borrowing cost for
the EFSM of 2.59%.

39. ECB interventions
On 22 December 2011, the ECB started the biggest infusion of credit into the European
banking system in the euro's 13 year history. It loaned €489 billion to 523 banks for an
exceptionally long period of three years at a rate of just one percent. This way the
ECB tries to make sure that banks have enough cash to pay off €200 billion of their own
maturing debts in the first three months of 2012, and at the same time keep operating
and loaning to businesses so that a credit crunch does not choke off economic growth. It
also hopes that banks use some of the money to buy government bonds, effectively
easing the debt crisis. A second auction will be held on 29 February 2012.

41. European fiscal union and revision of the Lisbon Treaty
In March 2011 a new reform of the Stability and Growth Pact was initiated, aiming at
straightening the rules by adopting an automatic procedure for imposing of penalties in
case of breaches of either the deficit or the debt rules. By the end of the
year, Germany, France and some other smaller EU countries went a step further and
vowed to create a fiscal union across the eurozone with strict and enforceable fiscal
rules and automatic penalties embedded in the EU treaties.
On 9 December 2011 at the European Council meeting, all 17 members of the
eurozone and six countries that aspire to join agreed on a new intergovernmental treaty
to put strict caps on government spending and borrowing, with penalties for those
countries who violate the limits. All other non-eurozone countries except Great Britain
are also prepared to join in, subject to parliamentary vote

42. Eurobonds
On 21 November 2011, the European Commission suggested that eurobonds issued
jointly by the 17 euro nations would be an effective way to tackle the financial crisis.
Using the term "stability bonds", Jose Manuel Barroso insisted that any such plan would
have to be matched by tight fiscal surveillance and economic policy coordination as an
essential counterpart so as to avoid moral hazard and ensure sustainable public
finances.
However, Germany remains opposed to take over the debt and interest risk of states
that have run excessive budget deficits and borrowed excessively over the past years.
The German government sees no point in making borrowing easier for states who have
problems borrowing so much that they go into debt crisis. Germany says that
Eurobonds, jointly issued and underwritten by all 17 members of the currency
bloc, could substantially raise the country's liabilities in a debt crisis.

43. European Stability Mechanism (ESM)
The European Stability Mechanism (ESM) is a permanent rescue funding programme to
succeed the temporary European Financial Stability Facility and European Financial
Stabilisation Mechanism in July 2012.
the ESM will be an intergovernmental organisation under public international law and will
be located in Luxembourg.
Such a mechanism serves as a "financial firewall." Instead of a default by one country
rippling through the entire interconnected financial system, the firewall mechanism can
ensure that downstream nations and banking systems are protected by guaranteeing
some or all of their obligations. Then the single default can be managed while limiting
financial contagion.

44. European Monetary Fund
On 20 October 2011, the Austrian Institute of Economic Research published an article
that suggests to transform the EFSF into a European Monetary Fund (EMF), which
could provide governments with fixed interest rate Eurobonds at a rate slightly below
medium-term economic growth (in nominal terms). These bonds would not be tradable
but could be held by investors with the EMF and liquidated at any time. Given the
backing of the entire eurozone countries and the ECB "the EMU would achieve a
similarly strong position vis-a-vis financial investors as the US where the Fed backs
government bonds to an unlimited extent." To ensure fiscal discipline despite the lack of
market pressure, the EMF would operate according to strict rules, providing funds only
to countries that meet agreed on fiscal and macroeconomic criteria. Governments that
lack sound financial policies would be forced to rely on traditional (national)
governmental bonds with less favorable market rates.

45. Source:
• Wikipedia