The European Financial Crisis : The Monetary Crisis

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Huang, Will; Lewis, Evan; Magnuson, Clay; and Sandoval, Andre
April 25, 2015
ECON 1312-6
The European Financial Crisis
The European financial crisis has been an economic struggle for quite some time now. Because Europe’s economies are interdependent, when one gets out of balance the others are affected as well. One can argue, that the growing current account imbalances within the Euro area indicates an ongoing process of economic divergence rather than convergence. This is the foundation for why this debt crisis has been so difficult to solve. European officials and the best economist the world has to offer still have no viable solution for the matter at hand. We will look at several different aspects of the debt crisis, such as the …show more content…

In the short-term it seemed to work. Savings flowed from mature industrial economies, and there was a general increase of employment and job creation. Unfortunately, the short-term success never translated into long-term success. The Euro should be recognized as an experiment that failed. The implementation of the Euro resulted in many macroeconomic imbalances within the European monetary union that have become increasingly evident with time. Some effects of the Euro include a sovereign debt crisis, lost income, high unemployment, public debt build up, as well as social stress and sufferings. These imbalances derive from a couple different problems.
A huge complication with introducing the Euro was that it induced very low real interest rates. Low real interest rates causes money to go from savings to investment and consumption, heavily increasing public spending and borrowing. These extremely low real interest rates are due to the effect of the single Eurozone interest rate on the countries with relatively high inflation. The low real interest rates caused excessive expansion in consumption and construction. This combination in particular is very risky because it may lead to an economic bubble through a large amount of investment being poured into real estate and stock markets, and that is exactly what happened. A perfect example of this is in Ireland; their housing prices nearly quadrupled from 1995-2007. All in all these low interest rates greatly encouraged a

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