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The Eurozone crisis – some causes and effects

The Eurozone crisis; some causes and effects in Spain, Italy and FranceIntroductionIn early 2009 there was much talk in the media about the Eurozone crisis thatthreatened to bring one of the strongest currencies in the financial world to a standstill.In this paper I explain what the Eurozone crisis is, including some of the causes behindit and the effects it has had on the EU economy. I focus in particular on Spain, Italy andFrance as they are the three countries I plan on visiting, and because the effects of thiscrisis can still be felt in these countries today.In order to have a thorough understanding of the Euro-zone crisis, it is importantto be familiar with the historical background leading up to it. On November 1 st 1993, theEuropean Union was officially established under the Delors Commission leading to theformation of the European Economic Area. Many countries joined the “Single EuropeanMarket” and eventually the European Monetary Institute was established in 1999 alongwith the Euro, and the European Central Bank was created. On January 1 st 2002 theEuro notes and coins were put into circulation and replaced old national currencies.Since its public inception in 2004, many member states have joined including thegovernments of Spain, Italy, Portugal and Greece.Since joining the European Union some member states, such as the onementioned above began severely overspending. In the early 2000’s banks and investorswere willing to lend money for low interest rates and the public sector spending becameunbalanced. Then the financial crisis hit, debt levels in Portugal, Italy and Greecebecame unsustainable. The taxes these countries received were no longer enough tocover spending. (rest of history needs to be covered, throughout paper)CausesThe mentioned history set up a perfect storm for a financial disaster waiting tohappen. There is no clear cut cause for what caused the Eurozone crisis rather it wasan array of varying factors. The first being the easy credit conditions that existedthrough the European Union during the period from 2002- 2008 – Affordable Custom Essay Writing Service | Write My Essay from Pro Writers. This encouraged highrisk lending and borrowing, very similar to the factors that caused the U.S housing crisisin 2007, citizens in some European countries were taking on debt they could notmanage. Private companies were also responsible as they too maximized on lowinterest rates and large loans they could not repay. This problem was especiallysignificant in Southern Europe particularly Italy and Spain. Essentially country aftercountry was borrowing saving available from investment (which tripled $36 trillion to $70trillion in the global pool of fixed- income securities) creating bubble after bubble, asthese bubbles burst asset prices for example housing declined but the money owed toglobal investors remained the same. It is very similar to the United States housingbubble that burst in 2007 in this sense. Renowned economist Paul Krugman wrote "for awhile, the inrush of capital created the illusion of wealth in these countries, just as it didfor American homeowners: asset prices were rising, currencies were strong, andeverything looked fine. But bubbles always burst sooner or later, and yesterday’smiracle economies have become today’s basket cases, nations whose assets haveevaporated but whose debts remain all too real."The crisis also differed from country to country as I mentioned in Spain and Italyit was public debt that was out of control, in other countries such as Greece and Icelandit was government error that increased debt. In Greece the government promisedextremely generous pay to workers and pension benefits, Iceland banking systemcreated debts to global investors several times its GDP. Below is a graph comparingtotal government and public debt from 2000 and 2010 – Essay Writing Service: Write My Essay by Top-Notch Writer. It is also notable to mention thatin 1992 members of the EU signed the Maastricht Treaty in which they pledged to limitdeficit spending and debt levels. After certain EU states failed to stay within theseguidelines in the 2000’s in order to reduce this deficit raised funds to side stepguidelines, they did this through inconsistent accounting, off balance sheetstransactions, this too could have contributed to the debt crisis.Another main factor of the Eurozone crisis was the global financial crisishappening at the same time. In order to understand this one must begin in the UnitedStates where the housing bubble which peaked in 2006 – Write a paper; Professional research paper writing service – Best essay writers had burst and caused thesecurities invested in real estate pricing to record lows. Financial institutions globallyfelt the impact of this “crash”, the global stock market slowed down tremendously due tolack of confidence from investors and decline in amount of credit available. This resultedin a number of European bank failures, reductions in the market value of equities andcommodities and decline in the stock index. Eventually at the end of October 2008 – Affordable Custom Essay Writing Service | Write My Essay from Pro Writers,there was a currency crisis for the Euro.There was a global financial crisis around the time of the Eurozone crisis thatwas considered one of the worst since the Great Depression. The housing marketsuffered the most particularly in Spain and France resulting in lingering unemployment.Many European investors purchasing of U.S Government bonds in the global capitalmarkets, the value of the bonds plummeted with the housing market and Europeaninvestors were left to repaying the liabilities at full price. Due to the complexity of in theglobalization of finance an international imbalance of trade also played a part in theEuropean Sovereign Debt crisis. The trade deficit in Southern European countriesparticularly Italy and Spain affected the changes to labor costs, causing Italy’s unit laborcost to rise 32% (as opposed to Germany) , since 2001. The countries that allowed“wages to grow faster than productivity” suffered a loss of competition.Structural errors of the Eurozone system mainly that there was no fiscal unitybetween the member states, the members do not have a common treasure to enforceregulations but rather the taxation, expenditure etc is left in the control of each memberstates sovereign government. Essentially this leads to countries picking and choosingwhich rules they want to follow and which they do not, as can be seen in the example ofItaly and Greece. “Eurozone” is composed of 17 countries and requires unanimousagreement for decisions to made, so when one country fails to follow through on itsshare of responsibilities, it is very hard for the EU to respond quickly and efficiently tothe problem. All the countries become interdependent because they share a commoncurrency but they do not share the same budget discipline, work ethics or politicalntegrity. Anger had grown in the European countries themselves with financiallyconscious countries such as Germany and France seething at the governments ofGreece and Italy.Finally perhaps one of the most important reasons why the global financialrecession including the Eurozone crisis has lingered is the lack of confidence byregulators, investors and the public. It was falsely assumed that banks that hadsubstantial holdings of bonds even if was from a weaker economy would not be thatrisky but the bonds proved to be extremely risky and banks were taking substantiallosses. This loss of confidence is seen by rising CDS prices which indicate marketexpectations. (See graph below produced by Bloomberg)Investors have serious doubts about law makers ability to control and regulate, andsince countries that use the euro as their currency do not have their own personalmonetary policy choices , solutions require an effort from all member states. Accordingto The Economist, the crisis "is as much political as economic", if banks fail, it is unlikelythe government will be able to fully respect their commitment, and there is the possibilitythat they might abandon the Euro and revert to a national currency; so deposits aresafer in Dutch, German, or Austrian banks than they are in Greece or Spain andinvestors are careful to be mindful of the politics in these countries.Effects on the economy of Spain, Italy and FranceSpainThe Eurozone crisis deeply affected the ecoomy of Spain till 2004 when politicalpower shifted, the main problem was Spain’s trade deficit, which was 10% of thenational GDP causing it to lose competiveness with its main partners. This coupled witha high inflation rate and the housing bubble created a hostile economic situation. Houseprices increased 150% increasing family debt. The economy contracted in 2008 – Affordable Custom Essay Writing Service | Write My Essay from Pro Writers and itwas officially announced to be in a recession in 2009.Spain also suffered an unemployment crisis, in July 2009 almost 1.2 million jobswere lost and at the end of March the following year the Spanish unemployment ratehad reached 17.4% with almost 4 million people unemployed. In 2014: 2024 – Essay Writing Service. Custom Essay Services Cheap the Spanishgovernment introduced a radical new labor reform, which included flexible labormarkets, contracts and labor flexibility leading the unemployment gap to slowlydecrease. The Spanish public (government) debt was lower relative to total GDP thanother EU members. Since the Eurozone, the economy of Spain has seen fluctuations inits growth. In 2014: 2024 – Essay Writing Service. Custom Essay Services Cheap the Spanish economy over 25% of the workforce was unemployedand the economy contracted 1.4% until Q3 of 2013. However despite this internationaltrade has improved due to increasing exports and the growing number of tourists. In2013 for the first time in 30 years Spain achieved a trade surplus.ItalyItaly’s economy is as diverse as its many political factions, Italy was one of thecountries hit hard by the great Depression and fascist government nationalized largebanks, and became known as corporatism. Eventually social and political unrest led toeconomic failure and throughout the 1970’s stagflation and stagnation became a hugeproblem in Italy’s economy. Italy was gain hit hard by the crisis of 2007-2011. Thenational economy decreased by 6.76% during the recession.The Italian public debt stood at 116% of GDP making it the second biggest debtration in Europe following Greece. Italy’s sovereign debt rating was lowered in 2011,and has been struggling since to recover. In present rimes the Italian per capita GDPremains fairly close to the average of the EU, but the unemployment rate is still at 8.5%.Italy has innovative business economic centers, which is home to some of the world’slargest and profitable fashion houses, making it the 7 th largest exporter. The agriculture,industrial and appliance industries are also thriving in the Italian economy. Despite theItalian economy’s various historical struggles, the Human Development Index along withthe Economist have rated Italy very high in terms of quality of life, The Economist gaveItaly the world’s 8th highest quality of life ranking. In the graph below I show Italy’s GDPper capita PPP as opposed to other European nations including France.FranceFrance has one of the largest economies in the world, and is the second largesteconomy in Europe. France’s economy similar to that of Italy and Spain suffered in theglobal recession of the late 2000’s. Frances economy differs from Spain and Italy in thefact that France has long been one of the world’s wealthiest economies, consistentlygrowing before the recession. During the recession in 2011, the GDP grew at 1.85%while many of its European counterparts were suffering massive losses. The Frenchgovernment debt is about 1,833 billion Euros and has run a budget deficit every yearsince the 1970’s. France has been downgraded in credit rating agencies like Italy in2014: 2024 – Essay Writing Service. Custom Essay Services Cheap. France is ranked as one of the wealthiest countries by multiples publications andaccording to the IMF has a per capita GDP of $45,460. It is also ranked extremely highon the United Nations Human Development Index and Corruption Index. Compared toItaly, corruption is very low in France. In the Forbes global 500 France ranks 5 th becauseit has 31 of the 500 biggest companies in the world, more than New York, London,Munich and Beijing. Some of these companies include L’oreal, Air France, VeoliaEnvironnement and BNP Paribas.Work Best paper writer websites, Custom term paper writing service and Research papers owl essays – Professional help in research projects for students – Cite dhttps://essays.homeworkacetutors.com/write-my-essay/businessinsider.com/core-unit-labor-costs-in-germany-2011-11https://essays.homeworkacetutors.com/write-my-essay/economist.com/node/21556624https://essays.homeworkacetutors.com/write-my-essay/bbc.com/news/business-16290598https://essays.homeworkacetutors.com/write-my-essay/economist.com/node/21536871http://europolitics.info/https://essays.homeworkacetutors.com/write-my-essay/cnbc.com/id/37207942/Could_Italy_Be_Better_Off_than_its_Peers

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