The European Sovereign what??
EU countries could borrow at a cheap rate - because it was assumed they were following the economic rules of the single currency.
This effectively meant that the good credit rating of Germany was improving the credit rating of countries such as Greece, Portugal and Italy.
Some countries used this cheap finance and built up large balance of payments deficits, hoping to stimulate growth - which the financial crisis prevented
This European Sovereign Debt crisis has been getting worse - see Greece as an obvious example
The effect is an increase in the cost of borrowing for governments worldwide
In May 2010 the EU created the European Financial Stability Facility (EFSF) which provides bailout loans to these countries
What's all this I hear about "Austerity"?
Many countries are now spending less to decrease their debt - this is what austerity is
Austerity was needed even more when many countries paid to save their banks from bankruptcy meaning they had to borrow even more
The obvious problem here is people are paid less, less investment is made and ALL countries suffer - particularly in the EU where these countries trade heavily with each other (this is referred to as 'financial contagion'
One final problem is that the Euro then loses value. This means that buying goods from abroad becomes even more expensive