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
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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
Rough Draft & Thesis Statement Minorities are faced with housing discrimination on levels much higher than that of white people which is considered white privilege. Residential segregation has been strategically planned and carried out by multiple parties throughout history and persists today ultimately inhibiting minorities from making any of the social or economic advances that come from living in affluent neighborhoods and communities. From our research, the scholarly sources have depicted multiple causes of racial disparity. Housing segregation perpetuates negative circumstances for people of color, as looked at through history, laws, segregation, real estate, and ... The end of the Civil War and the start of the Industrial Revolution and
Americans are constantly sharing their opinions about the government. In Stupid White Men by Michael Moore, he conveys his perspective. By putting several individuals on the spot, he reasons how the country went downhill, including the economic catastrophe, and the political, economic, and environmental issues. In addition, Moore touches on topics of racism and gender. Michael Moore provides readers with specific precedents that lead us to agree with his view on the country, “our Century 21 Nightmare!”
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.
A similar proposed, but not enacted, solution was suggested called the European Stability Mechanism, a permanent system put in place to replace the fleeting EFSF and EFSM.10 Another proposed solution, popularized by Jakob von Weizsäcker and Jacques Delpla, are what are called “Eurobonds”.11 A so-called Eurobond is where investors loan some money to the European Union at a certain interest rate (among the notable opponents, Germany starkly disagreed with this policy, remarking that it is frivolous to make borrowing easier for countries in which the very cause of the problem was too much borrowing)12. Additionally, the European Central Bank (“ECB”) has also intervened in various ways.13 The aforementioned methods include, most prominently, a pledge to pursue all avenues necessary to help the debt-ridden countries meet their fiscal objectives for this year and the years to come. What these solutions are all lacking is a collective power to enforce fiscal responsibility. If PIGS are all bailed out utilizing the EFSF and the EFSM, along with the process of sucking dry the ECB, is there any telling whether or not they can use the money productively, or, if the governments do, can they maintain their path along
Edgar Allan Poe is one of the most recognized and praised fiction writers in world literature. Not only does he masterfully create the atmosphere of suspense and danger in his short stories, he also builds up a sophisticated blend of horror and elegant irony that haunts the reader and reveals the complexity of Poe’s literary talent. “The Cask of Amontillado” is a perfect example of such combination. In this twisted short story of revenge, Poe puts an emphasis on the ironic tone in order to highlight the relationship between Montresor and his victim Fortunato and reveal the evil nature of Montresor’s desire for cruel vengeance.
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 Treaties of Rome which established the European Economic Community in 1957 announced that a Single European Market was the aim of the development which would accelerate prosperity and contribute to a closer union of the European nations. The Single European Act (1986) which launched the European Single Market programme and the Treaty of the European Union is based on this foundation. The treaties lead to the Economic and Monetary Union and are the cornerstones for the coherent currency. The third step towards the EMU began at the 1st January 1999, when the conversion rate was irresistibly locked in. From then on all the member states operated in a unitary monetary policy. The Euro was established as the legal means of payment and at first the eleven national currencies were reduced to subunits of the Euro. Greece joined the Euro system on 1st January 2001 and finally the European paper money and coinage were introduced to the 12 member states of the European Union on 1st January 2002. The introduction of the Euro presents a milestone on the way towards a united Europe in which the people, the public services and the assets have freedom of movement. The member states hoped to gain from the Monetary Union two kind of chances: On one hand it is supposed to present the motor for further political integration in Europe and on the other hand – in addition to the Single Market – it was expected to launch higher
European Monetary Union will make it possible to complete European economic integration. The introduction of a single currency will
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.
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
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
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.
The European sovereign debt crisis, which made it difficult or impossible for some countries in the euro area to repay or re-finance their government debt without the assistance of third parties (Haidar, Jamal Ibrahim, 2012), had already badly hurt the economies in “PIIGS”, Portugal, Ireland, Italy, Greece and Spain. This financial contagion continues to spread throughout the euro area, and becomes a dangerous threat not only to European economy, but also to global economy.
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.
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