College Papers

p.p1 rapid credit growth, extensive leveraging of assets,

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The financial crisis of 2008 has been the worst economic phenomenon since the great depression of 1929. The crisis of 2008 has had many similarities to crises in the past. The economic crisis preceded a time where there was rapid credit growth, extensive leveraging of assets, capitalisation on bubbles in the real estate market, low risk premiums, high availability of liquidity and not to forget the incredible rise in asset prices. This over pricing of assets and financing of such assets have made financial institutions incredibly venerable, for any changes and fluctuations in the asset market. This resulted in any change being hard to handle for the institutions. This venerability was met when there was a change in the American sub prime market, resulting in this financial structure to crumble and collapse. One must not forget that such crisis have happened before and that it is not a new occurrence. Such a crisis also occurred in the Nordic countries and Japan in the 1990’s. While such a crisis has happened, this time it was slightly different, it was a global phenomenon as multiple states were involved. During this time the European Union faced the biggest contraction in real gross domestic product (RealGDP) in history. The diversity of the european economy has slowed the impact down, resulting in time to come up with a reaction for this crisis. The European Economies strength range from agriculture, tourism, technology, manufacturing and service based industries. This diversity of markets is one of the great strengths of the european economy, but also its down fall.  The impact that this crisis has had are astronomical. Five member states of the union have rapidly obtained high sovereign debts and have been in cycles of austerity and bailouts since 2009. The crisis have coast numerous european citizens their life savings, due to wrong investments in both real estate and banking bubbles. While all member states at the time could come to an agreement that there was a problem, no state could agree on what the fundamental reason was and the correct solutions for the crisis. The European Union has done great things for the economies of its members state, such as open up free markets, presenting great economic opportunities. There are some aspects which have stimulated the crisis onto some countries more then others, namely the southern nations, the reason? The currency has shifted. The one common currency, the euro, had moved into a united monetary policy, a policy under the European central bank and not the national bank of the 17 nations. This policy (that has a more Keynesian ideology) have been more aligned with western and northern nations, such as the Bundesbank in Germany. This presented issues for southern nations that, in the past, utilised the factor of inflation as a positive aspect, to stimulate financial public spending and increase the competitiveness of the nations products in export. This loss in monetary autonomy has led to the southern nations being pressured to provide comparable benefits and social protections as richer Northern countries. While at the same time enduring the loss of jobs in the manufacturing sector to Asia. This scenario has led southern nations to rely on other income streams, such as tourism and bailouts to be able to finance their national debt, which has consequently effected speculative investment from other nations. This downfall of these 5 nations have resulted in the common currency to take a hit, effecting not only the souther nations but all nations that hold this currency. While the crisis in Europe is only seen as an economic crisis, there is also another side to it, the human side. The rise in unemployment was not only harming the economy but also the moral, hope, trust and support of the european union. This can be displayed by a poll which was made by Pew Charitable Trust in 2013, where it was found that there was only 41 (Gardner, A  2013, May 16) precent support for the Union amongst its citizens, with astronomical low ratings in nations where the unemployment rate had been affected by the crisis. 

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The European Union responded to the crisis with the European Economic Recovery Plan, which was launched in December of 2008. The goal of this plan was to bring back confidence, for businesses, consumers and European citizens, while stimulating the economy and stimulate investments back into european areas, by upping the purchasing power to inevitably increase demand. The idea behind this program and plan was to create a platform which would stimulate agreements between states to enable the european economy back onto its feet and into growth. The European Union program set out to build on the framework that already existed by setting out actions to stimulate investment into european markets and economies such as, construction, infrastructure and industries (such as the car industry). The commission called for the budgetary changes to be targeted and temporary, to increase efficiency. The recovery plan also implements a coordinated fiscal stimulus, it proposes that members coordinate budgetary packages aimed to stimulate and to optimise the impact, avoiding negative effects such as spill over from one nation to another. This package would amount to 200 billion euros, equal to roughly 1,5 precent of the GDP of the European Union (A European Economic Recovery Plan, 2008). This combination between national level and european level is crucial and necessary to avoid negative demand, unemployment and to protect jobs and growth in the union. One of the more crucial aspects of the recovery plan is the aspect of financing and investments. This includes measure of the EIB’s response to the crisis, increasing the annual financing by a total 15 billion over the spread of two years (A European Economic Recovery Plan, 2008). This increase of financing will be done through increasing loans, guarantees, equity and financing that shares risk. The commission also advises commercial banks to proceed on their activities and especially in the financing of investments.