Concerns have focused on the sustainability of public deficits in some Eurozone countries, but the Eurozone has also faced a number of related economic challenges, including weaknesses in the Eurozone banking system, slow or negative economic growth, rising unemployment, and persistent trade imbalances within the Eurozone. Some Members of Congress have expressed concern about the possible effects of the crisis on the U.S. economy, the appropriate role of the International Monetary Fund (IMF) in the crisis, and the implications of the crisis for future U.S.-EU cooperation on foreign policy issues. Over the past two years, European leaders and institutions have pursued a set of unprecedented policy measures to respond to the crisis and stem contagion, particularly to Italy and Spain, the third- and fourth-largest economies in the Eurozone. However, a pledge by the European Central Bank (ECB) in September 2012 to intervene more aggressively has been credited with sustaining improved market sentiment, with many analysts remarking that the crisis may have "turned a corner." The economic crisis has also turned into a political crisis. Governments in many European countries have fallen as a direct or indirect result of the crisis. Additionally, disagreements among Germany, France, and the ECB over the appropriate crisis response, and complex EU policy-making processes, are seen as having exacerbated anxiety in markets. Economic Challenges Facing the Eurozone

Today, many of the concerns related to the Eurozone focus on high levels of public debt and government deficits in some Eurozone countries. Debt restructuring has also alleviated debt burdens for Greece and Ireland. A combination of deep cuts in public spending, rising unemployment, and economic recession in several Eurozone member states has provoked recurring, large-scale protests. Current Status

Market pressure against the Eurozone eased considerably in the fourth quarter of 2012 and the start of 2013, with some analysts suggesting that the Eurozone has "turned a corner." In February 2013 and March 2013, the Eurozone crisis cycled back into a period of uncertainty, fueled by recent developments in Italy and, in particular, Cyprus. In February 2013, a general election in Italy failed to produce a clear winner, leading many analysts to worry that political instability might heighten investor unease about the country's fiscal position. Concerns about the stability of public finances and banks in Cyprus came to the forefront in March 2013. A tentative agreement between the Cypriot government, the Europeans, and the IMF was unanimously rejected by the Cypriot parliament. To date, however, contagion of Cyprus to other Eurozone countries has been limited. Although new institutional arrangements being proposed could increase integration among European countries, they argue that the result will fall short of a creating a full fiscal or political union and that the Eurozone will emerge from the crisis largely in its current form. In general, the Eurozone crisis has bolstered interest in trade and investment liberalization between the United States and the EU, as a way of promoting economic recovery in both economies, as discussed in greater detail below. In February 2013, the Obama Administration, the European Commission, and the European Council announced that the United States and the EU plan to launch negotiations on a Transatlantic Trade and Investment Partnership (TTIP). The United States has not pledged any new funds to the IMF as part of this effort. As the biggest shareholder in the institution, the United States may want to consider how to balance, on the one hand, making sure that the IMF has the resources it needs to ensure stability in the international economy with, on the other hand, exercising oversight over the exposure of the IMF to Europe and any potential concessions that countries are looking for in exchange for providing financial assistance. Implications for Broader U.S.-European Cooperation

The United States looks to Europe for partnership in addressing a wide range of global challenges, and some analysts and U.S. and European officials have expressed concern about the potential effects of the Eurozone crisis on U.S.-European political and security cooperation. The crisis could also exacerbate a long-standing downward trend in European defense spending and cast further doubt on Europe's willingness and capability to be an effective global security actor in the years ahead.
Crisis Overview
What started as a debt crisis in Greece in late 2009 evolved into a broader economic and political crisis in the Eurozone and European Union (EU). The Eurozone faces four major, and related, economic challenges: (1) high debt levels and public deficits in some Eurozone countries; (2) weaknesses in the European banking system; (3) economic recession and high unemployment in some Eurozone countries; and (4) persistent trade imbalances within the Eurozone.
The economic crisis also turned into a political crisis. A combination of deep cuts in public spending, rising unemployment, and economic recession has provoked large-scale protests in several Eurozone countries, and several governments have fallen as a direct or indirect result of the crisis. Additionally, disagreements among key policymakers over the appropriate crisis response and a complex EU policy-making process are seen as having exacerbated the crisis.
Recent Developments and Outlook
Market pressure against the Eurozone eased considerably in the fourth quarter of 2012 and the start of 2013, but uncertainty increased in February and March 2013, particularly driven by developments in Cyprus. The sentiment that the crisis had "turned a corner" at the end of 2012 was largely driven by the European Central Bank (ECB) and its new bond-buying program. Announced in September 2012, the program has not yet been triggered but is viewed by many as successful in restoring market confidence, particularly in Italy and Spain, the third and fourth largest economies in the Eurozone. Other developments helped calm markets, including debt restructuring in Greece and Ireland and progress towards creating a Eurozone "banking union."
The crisis flared in February and March 2013, highlighting the continuing challenges facing the Eurozone. The February 2013 election in Italy failed to produce a clear winner, raising concerns that political instability could heighten investor unease about the country's fiscal position. In March 2013, Cyprus's banking crisis came to the forefront. A tentative assistance package that included taxing depositors was rejected by the Cypriot parliament. After a week of tense negotiations, a new agreement was reached that does not tax small depositors. Although the new agreement is broadly expected to be finalized without problems, concerns persist about potential contagion to other Eurozone countries.
More broadly, fundamental challenges in the Eurozone remain, including lack of economic growth, high unemployment, and internal trade imbalances. Analysts disagree about the likely outcome of the crisis. Some analysts argue that the Eurozone will be able to "muddle through," making incremental changes without changing the structure of the Eurozone. Others argue that European leaders and institutions will reform, and that the EU could emerge from the crisis stronger and more integrated. Others still have not ruled out some countries, particularly Greece, exiting the Eurozone, although improved market sentiment has limited discussions about a potential Eurozone breakup.
Issues for Congress
Impact on the U.S. Economy: The United States has strong economic ties to Europe, and many analysts view the Eurozone crisis as one of the biggest potential threats to the U.S. economic recovery. Additionally, the crisis has bolstered interest in U.S.-EU trade and investment liberalization, to bolster both economies. In February 2013, the Administration and EU officials announced plans to launch talks on a Transatlantic Trade and Investment Partnership (TTIP).
IMF Involvement: In response to the crisis, some countries have pledged additional funds to the International Monetary Fund (IMF). The United States has not pledged new funds to the IMF as part of this initiative. Members of Congress may want to consider how to guarantee that the IMF has the resources it needs to ensure international economic stability and to exercise oversight over the exposure of the IMF to the Eurozone.
U.S.-European Cooperation: The United States looks to Europe for partnership in addressing a range of global challenges. Some analysts and policymakers express concern that the crisis could keep much of the EU's focus turned inward and exacerbate a long-standing downward trend in European defense spending.