Aidan Horn (HRNAID001) ECO1011F essay 1 03/04/2015 Page 1 of 8 THE EFFECT OF THE EUROPEAN SOVEREIGN DEBT CRISIS ON THE SOUTH AFRICAN ECONOMY UNIVERSITY OF CAPE TOWN, DEPARTMENT OF ECONOMICS (ECO1011F ESSAY 1) AIDAN HORN (HRNAID001) TUTORIAL GROUP 4 (TUTOR: MARUMO MONONELA) The European sovereign debt crisis negatively impacted economies across the world, including South Africa’s. This essay focuses specifically on how this crisis, which was somewhat precipitated by the Great Recession of 2008-09, impacted South Africa’s (SA) economy. The essay follows a chronological discussion. Firstly, it is focused on the state of the South African economy and South Africa’s fiscal policy before the Great Recession. Secondly, it describes how SA’s economy responded to the European sovereign debt crisis, which started in 2009, and what domestic policy changes were made. Finally, SA’s economic recovery since the crisis is discussed, with mention being made to policy changes in recent years. The essay makes use of the aggregate demand - aggregate supply (AD-AS) model and other elementary economic concepts in order to provide an economic analysis of the events being described. Before discussing the effect of the European debt crisis, it is instructive to know the state of the South African economy in the years before the Great Recession. The South African economy showed strength in the years preceding the global 2008-09 recession. In 2007, SA had experienced 15 years of positive GDP growth and was in its 8 th year of an expansionary phase of the business cycle (SARB 2007:2). Since 2001, SA’s GDP growth rate, although low, was above the world average and the European Union (EU) average, indicating that SA was in a better position to handle the recession before it came (World Bank 2015a). However, although SA’s economy