What were the causes of the sovereign debt crisis in Europe? How could it have been prevented?

It all begin with the credit crunch that was in 2007-2008, where many European banks were receiving great losses especially the Greek banks. Thus, a reduction of lending and investment from banks occurred, creating a recession which occurred in 2009. With that being said, a high level of debt was already found in Greece previously which only further declined the public finances for them. Not having a competent economy, among other countries such as Romania, Hungry and Latvia. They were unable to handle the recession which made them request for an external financial assistance from the EU. Greece was a special case though; having a public sector that was poorly managed, insignificant fiscal policy, weakness in their structure and statistical misreporting led to the sovereign-debt crisis that we know of in Greece. Consequently, many investors lost faith in those countries’ ability to pay the debt off. Where many reasoned that they should be bailed out. In 2015, sovereign yield was returned to normal for all countries, except for Greece. And today, there is an uncertainty of whether the EU could survive. It could have prevented by establishing an insurance fund used to ease off countries in trouble or even propose a bail out from other countries that are willing to pay off the debts of suffering countries without asking for repayments.

Why did the Bretton woods system ultimately fail?

• Agreement had a limit on the amount possible to borrow that the countries wanted
• US wanted to spend more than the agreement under Bretton Woods
• Members of the Bretton woods system were supposed to peg their currencies to dollar, and the US were supposed to peg their dollar to gold, so that it were operate as a gold standard.
• Fiat money were introduced being more convenient, role of gold was outlived.

 

Do you think we should return to a gold exchange system?

No, because:

• Value of gold is not stable and fluctuates widely
• Inflation can be kept down better with the use of a fiat monetary system
• Economic growth may outpace the growth of money supply since money could only be created with more gold which is harder to obtain
• In the US history gold standard has shown to have caused bank failures, financial panics (money could not be printed unless there is more gold) , and a prolonged great depression (in 1933, US went off the full gold standard, and this recovered the economy).