The European Financial Crisis : The Monetary Crisis

As of 2012, only seventeen of members of the European Union have decided to use Euros as their currency. In order for the members that adopted the Euro as their currency to successfully help their economic problems, the Eurozone members had to follow strict instructions put into place the European Union. The strict policies included strict control over inflation, government debt, and long-term interest rates (Mckee 525). The union put these strict policies into place to give the union the tools that it needed to take in order to help fix the economic crisis in each country participating in the Eurozone. Without the full cooperation of each country, it could cause the plans to fix the economic crisis within each country to fail because of the different interests by each individual country.

Prior to the introduction of the Euro there was a lot of debating to what extend the Euro could function in the Eurozone. Some of the criticism came from the OCA theory where it was argued that the euro zone was not an optimal currency area because of the regional disparities among the member states. A monetary policy that might be right for Germany and the Netherlands might not be as beneficial for countries like Spain and Italy. Other criticism originates from the period of the European Exchange Rate Mechanism (ERM). Before the Euro was introduced the Bundesbank had been running German monetary policy and because it was effective in maintaining low inflation rates, other countries were pegging their currencies to the Deutsche mark as well as they could. Therefore, a major concern also was on the

By the end of 2008, the European Union began experiencing rippling effects of the United States financial crisis. Several member countries, most notably on the southern end of the continent, faced high levels of debt and unemployment. Portugal, Iceland, Ireland, Greece, and Spain, derogatively referred to as “PIIGS,” required extensive economic support from the EU in order to repay government debts and bail-out private banks. Disbursal of aid in 2010 proved successful in promoting economic recovery in some countries; however, the vast majority observed only slight economic improvement which led to doubts regarding the effectiveness of the harsh austerity measures implemented. Ireland has most clearly benefited from the financial support of the European Union as the country’s unemployment rate has dropped below ten percent and is expected to witness 4.5% GDP growth in 2016. Portugal, on the other hand, shows little fiscal improvement as evident in an unemployment rate of 13% and an expected GDP growth of only 1.6% in 2016. Although both countries faced tough financial crises in 2010, Ireland has notably outperformed Portugal in resolving the situation. The weak economy in Portugal, as well as continued fiscal hardship in the remaining “PIGS” countries, threaten the preservation of the European Union as financial inequality between the members persists.

The Eurozone is facing a serious sovereign debt crisis. Several Eurozone member countries have high, potentially unsustainable levels of public debt. Three—Greece, Ireland, and Portugal—have borrowed money from other European countries and the International Monetary Fund (IMF) in order to avoid default. With the largest public debt and one of the largest budget deficits in the Eurozone, Greece is at the centre of the crisis. The crisis is a continuing interest to Congress due to the strong economic and political ties between the United States and Europe.

Most citizens of the euro area did not understand what they were losing when the Maastricht Treaty was signed in 1992, and the euro introduced in 1999. You couldn’t see it until there was a serious recession—when the government really needed to use expansionary

On November 1, 1993 the fate of our economy was decided. After one half of a century of waiting, the Eurozone came to a solemn existence. The once great powers of the world, the European nations, had completed a risky, and perhaps foolish, task. The world’s first regional economic system was successfully created. Now, almost two decades later, the world’s economies are on the verge of collapse, and it seems that no economy, other than the Eurozone, is at fault, due to its recent and quite careless economic endeavors. As the rest of the world continues to force the blame upon the Eurozone and its twenty-five member states-including the United Kingdom of Great Britain and Northern Ireland, France, Spain, Portugal, Italy, and Germany, we

The terrible internal economies control. The countries in euro area, especially Portugal, Ireland, Italy, Greece, and Spain lost their control over the domestic financial situation. Specifically, Greece had long standing financial problems. The government spent largely on the social welfare, and had a great number of public servants who had extremely generous wage and pension benefits. Besides, the government had little control over its budget deficit, leading a long standing financial budget overrun. In Ireland, the estate bubble greatly destroyed government tax income and consumption power of public. Portugal’s lasting recruitment policies led to a great number of redundant public servants. The Italian economy suffered from the high unemployment rate and high tax rate, and had a slow growth in recent years.

But the Euro is not just a currency, it’s an expression of a political ideal. The main architects of the Euro Zone were the German chancellor Kohl and the French president Mitterrand: when in 1990 West Germany and East Germany wanted to reunite, the USA and the Soviet Union were favorable, whereas Britain and France feared a new German dominance would begin, so they suggested to put the new re-unified German economy under European control, thus the idea for the

On the other hand there are many threats and disadvantages of single currency. The countries that are in the euro zone are diverse and have different economic performances, which are a threat, since there might not be one ‘suitable for all’ monetary policy.

As mentioned earlier, globalization has led to all markets being tied together. With the United States being one of the biggest economies in the world, and the financial crisis it was going through in 2009, it started a ripple effect throughout Europe. With Americans defaulting on their mortgages, banks in Europe who had invested in the United States housing by buying bonds, were now losing money.

Furthermore, the Fund also recognized that after nearly four years of “internal devaluation,” the economic strategy had not succeeded. The idea of an “internal devaluation” is that if you create enough mass unemployment and push wages down far enough, the economy can become more competitive due to lower labor costs. This allows exports to grow, and import-competing industries to also do better, improving the trade balance. Since exports add to economic growth and employment, and reduced imports do the same, the economy can recover in this scenario due to increasing net exports (exports minus imports). Normally this could be attempted through a devaluation of the currency. But the troika has only recently shown any intention of trying to push the euro’s value down against external trading partners; and of course since it is a common currency, the more depressed economies within the currency union can’t devalue against the others (e.g. Spain versus Germany). This leaves “internal devaluation” as the remaining hope for recovery for countries such as Spain, Greece, and Portugal. In other words, despite the negative impact of the fiscal austerity, the theory is that “internal devaluation” based on lower labor costs can drive recovery based on the growth of net exports.

In this paper, we present an in-depth analysis of the nature, causes, economic consequences, prevention as well as control of the European Debt crisis. A definition of the debt crisis is also provided. Recommendations on the way forward are also provided.

The global financial crisis of 2008-09 that spread contagiously across the globe has particularly hit the European economies hard, accentuating turmoil in the world financial markets and precipitating the European sovereign debt crisis almost instantaneously. This has consequently wiped away all of EU’s accomplishments in economic growth and job creation (European Commissiona 2010:3). Statistics published subsequently exposed the magnitude of the crisis: real GDP contracted by 4%, unemployment soared at an unprecedented level, deterioration of public finances, and the fragmentation of social cohesion in the EU (Eurostat 2010). The

Looking at the development of the Eurozone almost 15 years after the Euro introduction, the gross domestic product (GDP) of the Eurozone has only minimally (0.6%) increased in 2015 compared to 2007. Further, a pattern of divergence can be observed across the Eurozone. There are some countries which have experienced modest growth (i.e. Germany) and others that show a rather constant decline (i.e. Greece). The overall productivity has developed worse than expected, and is with an increase of only 0.6% from 2007 to 2015 fairly low. Another important indicator of the well-being of a country is the standard of living, measured by GDP per capita. This figure has been decreasing by almost 2% in the last 7 years. In terms of economic security, population still suffers under the crisis, shown in the increasing rates of unemployment and the decrease in government spending especially for social expenditures (i.e. Greece: 22% by 2015). A high standard of living also implicates a certain “connectedness” with family members, through the high youth unemployment rates in Spain, Italy etc. many young people leave their families in order to seek better opportunities in other countries (Stiglitz, 2016). Unemployment was on average 11% across the Eurozone and youth unemployment is levelled at twice that size, which will have enduring/long-lasting effects on future income and pension scheme. … “The euro has deepened the divide (…) weaker countries are becoming weaker and stronger are becoming

Additionally, a single currency and reduced macroeconomic unpredictability would produce other growth effects by reducing capital costs and creating a more integrated financial market through the removal of all exchange risk. With a “quieter” currency market international transactions are more secure and promotes portfolio and foreign direct investment flow. This more efficient allocation of international capital was expected to contribute to higher growth throughout Europe and a stronger presence in the global economy.