Solving The Economic And Political Dynamics

2239 Words9 Pages
In September 2008, a major U.S. bank, Lehman Brothers, collapsed triggering an economic crisis in the United States and throughout the globe. What followed this event was five years of economic distress throughout the continent of Europe. The crisis that hit Europe likely stands as the greatest test to the European Union, and the common market and currency in particular. Greece and Ireland both experienced what Jay C. Shambaugh deemed “The Euro’s Three Crises”- a banking crisis, sovereign debt crisis, and a growth crisis. According to this model, poorly capitalized banks, large deficits and public debt, and slow economic growth plagued Irish and Greek economic and political systems . Consequently, both of these nations required bailouts…show more content…
First, a sovereign debt crisis deals predominately with a nation financing their debt with government bonds. Investors buy these bonds because they offer a fair return and generally are considered safe investments. Countries benefit from a low price (interest rate) for borrowing when issuing bonds since they tend not to default . However, during the crisis interest rates for nations thought to be at a high risk of default by investors increased dramatically. This increased cost of borrowing impeded the ability of nations to rollover debt to the next time period and maintain government functions. Second, according to the International Monetary Fund, a banking crisis occurs when “a country’s corporate and financial sectors experience a large number of defaults and financial institutions and corporations face great difficulties repaying contracts on time” . This occurred in the United States and Europe when assets held by the banks such as real estate and sovereign nation bonds began to decline in value. In addition, the subsequent loss of confidence on the part of the financial markets following the collapse of Lehman Brothers resulted in the banks facing liquidity and eventually solvency problems, which required the Central Bank’s intervention . Thirdly, the slow growth of the European Union has compounded the two
Open Document