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Essay questions for Chapter 3 1. If all proposed programs designed to help the financially distressed EA countries are blocked by Germany and its Northern allies, is there any hope for recovery from the European sovereign debt crisis? If a solution exists besides the breakup of the EMU, please discuss this possible solution. 2. The first signal that the financial crisis had entered Europe was rising long-term interest rates. Explain why interest rates began rising. Did the long-term interest rates of all EMU countries increase or only those of a small group of EMU member countries? If interest rates of only a few countries increased, provide a list of these countries. State also the reasons that contributed to the increase in these countries’ interest rates. 3. High interest rates in some EA countries affected most aspects of the economy as credit became scarce and the cost of borrowing became very expensive. The most serious problem was the inability of the countries to borrow in the market. Explain how the exclusion of this group of countries from the international financial capital markets came to be the center of the European sovereign debt crisis. How did the EU officials and the EU country leaders address these problems? Do you agree or disagree with the joint EU and IMF approach to resolving the crisis? Explain why. 4. A few countries that were severely affected by the financial crisis in Europe received massive and unprecedented joint bailouts from the EU and the IMF. The rescue programs, © 2016 George K. Zestos however, were not successful in quickly ending the crisis. Explain the reasons why the bailout programs have failed. Do you think the inability or unwillingness of the bailout recipient countries to follow the bailout conditions is a major reason why the crisis is not resolved yet? Explain. 5. Once the EU and IMF agreed to bail out financially distressed countries, it was believed that the high debt to GDP ratio of the bailout recipient countries would decline as the real GDP was expected to increase. Greece, however, is in its sixth year of recession, and its public debt to GDP ratio has drastically increased particularly after Greece received its first bailout in 2010 (see Figure 5). Why did the bailout program for Greece fail to end the crisis and thus reduce the debt to GDP ratio? 6. Very low international competitiveness was suggested as a possible cause of the recession in the EA periphery countries. Explain any direct or indirect indicators that suggest countries were affected by their poor international competitiveness. What can countries do to increase their international competitiveness? Suggested class debates 1. (Note to the professor: Please divide the class into two groups; one representing the Northern EA countries and the other into the Southern EA periphery countries.) Students representing the periphery countries should support the position that the crisis is unresolved because the Northern EA countries lack solidarity and commitment to support the EMU. Students representing the Northern EA country leaders should support the © 2016 George K. Zestos position that the crisis is caused by a lack of fiscal discipline in the periphery countries. The professor should encourage the two student groups to debate various proposed programs until they find possible common positions for a solution to the European sovereign debt crisis. 2. Students should debate whether the austerity measures imposed on the bailout recipient countries have prolonged the recession in the EU or whether other factors are responsible for prolonging the recession. 3. Students are asked to debate the benefits and costs that arise from the mutualization of newly issued EA public debt (Eurobonds). The class should be divided into two groups; one that supports the issuance of Eurobonds and the other that does not. Each group will present arguments explaining the benefits and costs of public debt mutualization in the EMU; each should attempt to convince the other group of their views. © 2016 George K. Zestos