The euro countries currently experience a severe government debt crisis. Since Greece asked for financial assistance in May 2010 there has been a lively debate on how to resolve this situation. The solution that has been primarily suggested by politicians so far is to finance governments’ financial needs through emergency credits from EU sources (EFSF / ESM) and the International Monetary Fund. After explaining provisions like the stability pact and risk premiums on interest rates which aimed at guaranteeing fiscal stability in the pre-crisis EMU an overview is given showing financial and other political reactions to the crisis. In a second step, the sustainability of the Greek debt situation is extensively analyzed by employing the government budget constraint. The necessary primary surpluses enabling Greece to finance its government debt without international support as from 2020 onwards are, however, substantial. Therefore, it is very likely that Greece either needs further financial assistance or an additional hair cut in the future. Moreover, the effects of Greece leaving EMU are shown as well as the (financial) problems that would occur if further countries like Spain and Italy were infected. Finally, some suggestions are made how to avoid possible government debt crises in the future.
