EUROZONE CRISIS

The European Union set a strict path that members had to follow

Eurosceptic movements gained power among population

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The economic crisis of 2008 undermined the solidity that the Eurozone economy had had during that decade. The disequilibrium of the PIIGS economies (Portugal, Italy, Ireland, Greece and Spain) worried rating agencies that increased their sovereign risk rate and, therefore, caused the weakening of the common currency, the euro.

The beginning of the Greek crisis fiscal collapse in 2010 was one principal sequel in the economic crash, and overcame this crisis would be a challenge for the European Central Bank and the European Union, related to the future of the euro.

From 2002 to 2008, the dollar-euro exchange rate change from 0,859 to 1,55 reflecting a high strong of the community currency, but the explosion of the crisis provoke a great appreciation of the dollar because investors sold their assets nominates in euros to acquired American Treasury Bounds.

The principal stock indexes of Europe failed notoriously, the Ibex 35 from Spain failed53%, the German Dax 30 failed 40%, the FTSE from UK lost a 38% and the French CAC failed 50%.  One consequence of this disaster was the bankruptcy of Lehman Brother in 2008, the fourth bigger investment bank in the world.

In this graph we can see the behavior of the principal European stock indexes and the Dow Jones from USA, between 2002 and 2009.

Since the bankruptcy of the German banks HRE and Deutsche Bank, and of the Lufthansa airline, and its subsequent rescue by the German government, the European Union initiated the European Economic Recovery Plan with a rescue of 200 billion by the ECB, equivalent to 1, 5% of The GDP of the European Union. This plan prevented the bankruptcy of many European states since their debt had become unsustainable.

The main problem that caused the recession in Europe was the freezing of credit for the real economy. This was a problem for the companies, because their liquidity was exhausted and they became agents with a high risk for the banks, so the credit did not arrive and the companies could not continue with their activities in a normal way. As far as production, income, GDP and employment across Europe, among others, drastically decreased.

In the following graph we can appreciate the differences between the European GDP and the GDP from United States

Causes

Eurocrisis took place as a consequence of several complex concepts such as financial globalization, easy access to credit during the 2000’s, real state bubbles that failed and poor management by bank entities that went bankrupt and disappeared or were injected millionary funds from central banks (rescues).

In addition, governments were not prepared enough to deal with this recession, since economic previsions could not predict it accurately. This led to political changes and internal disputes along the continent. 

Finally, credit agencies did not elaborate their reports on national economies by calificating them correctly, because they were too conservative when evalutating. Some experts agree these agencies should have been faster when making public their results.

Consequences

Responses were very often controversial, since there have always been eurosceptics who did not rely on these steps that EU provided but at the same time imposed indirectly.

First of all, European Union created the European Financial Stability Facility(EFSF), an organism that was in charge of promoting economic stability. Moreover, EU made governments carry out very strict policies (reducing wages, increasing taxes…) in exchange of a economic rescue that would increase national debts.

Resultado de imagen de brexit

In addtion, as the union is composed by very different states that do not have the same economic power and importance, most important ones were a little reluctant at the moment of keeping on lending money to save the most affected ones. Even UK started the process to exit the EU («Brexit» idea).

The end of the crisis

It is commonly known that states have improved their macroeconomics data, although there is still much work to be done. Since 2014, unemployment rate has fallen noticeably all around the Eurozone, in addition to the growth of the common GDP (1’4% increased just that year).

This results have been possible due to the role of ECB estimulating economies and elaborating adjusted plans for every EU-member. In addition, the euro depreciation, the increase in internal demand and fall of petrol prices granted this improvements.

Controversy. There have been several trends that have critized EU policies. They have reported that not-keynesianist steps and deflationary adjustments can make economies as Greek or Italian ones be deeper. 

Barack Obama during a press conference.

Even the former president of the United States, Barack Obama, suggested that reduction in consumers’ income would lead to decrease in consumption, among other effects. According to him, it was necessary to apply more flexible policies.

To sum up, we can watch this brief video in which Eurozone crisis is described and accurately explained.

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