Inside the euro zone
Leaders of 26 European countries have agreed to forge a new treaty that would require strict caps on government spending and borrowing and impose penalties on countries that violate them. The deal left Britain as the only holdout. A primer on the European debt crisis:
A shared currency
More than half of the member states that make up the European Union use the euro as their single currency. Collectively known as the euro zone, these countries account for 19 percent of the world's gross domestic product and 14 percent of U.S. exports.
A shared crisis
The European crisis began in late 2009 over concerns about Greece's fiscal stability. Fears of instability quickly spread to Ireland, Italy, Portugal and Spain.
The euro zone has a central bank and a common currency, but it leaves fiscal policy up to the individual countries. Weak enforcement of fiscal discipline facilitated rising debts. But, locked into the euro, members couldn't make the kinds of changes they would if they had their own monetary policy, like raising inflation or devaluing their currency.
A new treaty
The European Union summit in Brussels ended with a pledge among 26 of the E.U.’s 27 nations to work toward a new treaty that would impose tougher controls over government budgets. The treaty is supposed to be drafted by March, but it’s unclear how long it will take to ratify.
What the treaty will include:
Stronger policy coordination and governance. A procedure will be established to ensure that member states coordinate major economic policy changes.
Fresh powers to E.U. institutions to slap automatic penalties on governments that recklessly spend or borrow.
Strict targets on a country’s total debt and annual budget deficits. The treaty will probably give countries several years to reach the limits.
Tough road ahead
Of the 17 countries in the euro zone, all but five are above the proposed cap on total national debt as a percentage of gross domestic product, and all but three are above the proposed cap on deficits.
Ask yourself the following questions and see how the crisis might impact your life.
The financial crisis among the 17 nations that use the euro has been characterized by a series of missteps and missed opportunities on the part of the region’s political leaders, whose preference for cautious incrementalism has allowed a seemingly limited set of problems in Greece to threaten the entire currency union.