EUROPEAN MONETARY UNION

Does the economic bailout of Spain and Greece spell the beginning of the end for the European Monetary Union (EMU)?

Executive Summary

Purpose of the Study: Overview of the Euro Crises

Euro zone is struck by one of the complex and destructive financial crunch, which has badly affected Spain, Greece and Italy largely and it has further consequences on all the countries lying within the Euro Zone. The main purpose of this study is to conduct thorough analyses of the crises situation faced by EMU. That includes investigation of the sources of EMU Bailout Funds, Role of European Central Bank (ECB) and European Investment Bank (EIB), and savior schemes of Euro Zone. This research shall be helpful to forecast the financial and economic status of Euro Zone today and in the future. It mainly focuses on the breakup of the EU countries, Consequences of the major defaults of Spain and Greece, practices of ECB and EIB, and ways to cure from this financial turmoil. Research method used is primarily Secondary Research, including newspapers, electronic sources, articles, magazines and Journals.

Discussion

Source of EMU Bailout Money

One of the major victims of Euro Crises, Spain had been provided with €100 Billion by EU i.e. estimated to be10% of Spain's GDP. These funds are meant to be for those banks that go bankrupt. However, these loans are offered at a moderately cheap rate as compare to market but it would increase the overall national debt of the Spanish economy by 17%, thus, Spain 's creditability may gets affected badly (Roberts, 2012, n.d.).

The two main sources of funds are the ESM (European Stability Mechanism) or the EFSF (European Financial Stability Fund). ESM requires the approval from the Parliament of Germany to disburse bailout like those being disbursed to Spain. Therefore, ESM bailout is considered quite doubtful. In addition, ESM bonds would also not be given the preferred rating in this regard. In this situation, the next authority would be EFSF with €200 billion liquidity level. EFSF already owes €93 Billion to Spain, which is expected to be written off the books, thus, EFSF would own only €7 Billion after Spain Bailout. Hence it would not be capable enough to manage the rest of bailouts (Roberts, 2012, n.d.).

Beginning of the Domino's Effect in Euro Zone

Hence, its just a beginning of a bailouts, the next prospective victim of Euro Crises is Italy because of higher borrowing costs of lending. But, EFSF would not be able to fund this bailout with barely €7 billion (Roberts, 2012, n.d.). We can conclude that both of these bodies EFSF and ESM are small to manage turbulence. Eventually it would require help from other countries in the EU. Greece is also facing financial crunch, and going through a government reform, Greece is willing to negotiate bailout terms with EU inspired by Spain's situation. Ireland and Portugal are already in the same queue.

Role of European Central Bank (ECB) and European Investment Bank (EIB)

European Central Bank is trying to stabilize the turmoil by buying troubled bonds to ...