Posted:

The_Eurozone_crisis

The Eurozone crisis; some causes and
effects in Spain, Italy and France
Introduction
In early
2009 there was much talk in the media about the Eurozone crisis that threatened
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 behind it and the effects
it has had on the EU economy. I focus in
particular on Spain, Italy and France as they are the three countries I plan on
visiting, and because the effects of this crisis can still be felt in these
countries today.
In order to
have a thorough understanding of the Euro-zone crisis, it is important to be
familiar with the historical background leading up to it. On November 1st
1993, the European Union was officially established under the Delors Commission
leading to the formation of the European Economic Area. Many countries joined
the “Single European Market” and eventually the European Monetary Institute was
established in 1999 along with the Euro, and the European Central Bank was
created. On January 1st 2002 the Euro notes and coins were put into
circulation and replaced old national currencies. Since its public inception in
2004, many member states have joined including the governments of Spain, Italy,
Portugal and Greece.
Since
joining the European Union some member states, such as the one mentioned above
began severely overspending. In the early 2000’s banks and investors were
willing to lend money for low interest rates and the public sector spending
became unbalanced. Then the financial
crisis hit, debt levels in Portugal, Italy and Greece became unsustainable. The
taxes these countries received were no longer enough to cover spending. (rest of history needs to be covered,
throughout paper)
Causes
The
mentioned history set up a perfect storm for a financial disaster waiting to
happen. There is no clear cut cause for what caused the Eurozone crisis rather
it was an array of varying factors. The first being the easy credit conditions
that existed through the European Union during the period from 2002- 2008 – Affordable Custom Essay Writing Service | Write My Essay from Pro Writers. This
encouraged high risk lending and borrowing, very similar to the factors that
caused the U.S housing crisis in 2007, citizens in some European countries were
taking on debt they could not manage. Private companies were also responsible as
they too maximized on low interest rates and large loans they could not repay.
This problem was especially significant in Southern Europe particularly Italy
and Spain. Essentially country after country was borrowing saving available
from investment (which tripled $36 trillion to $70 trillion in the global pool
of fixed- income securities) creating bubble after bubble, as these bubbles
burst asset prices for example housing declined but the money owed to global
investors remained the same. It is very similar to the United States housing
bubble that burst in 2007 in this sense. Renowned economist Paul Krugman wrote”for a while, the inrush of capital created
the illusion of wealth in these countries, just as it did for American
homeowners: asset prices were rising, currencies were strong, and everything
looked fine. But bubbles always burst sooner or later, and yesterday’s miracle
economies have become today’s basket cases, nations whose assets have
evaporated but whose debts remain all too real.”
The crisis
also differed from country to country as I mentioned in Spain and Italy it was
public debt that was out of control, in other countries such as Greece and
Iceland it was government error that increased debt. In Greece the government
promised extremely generous pay to workers and pension benefits, Iceland
banking system created debts to global investors several times its GDP. Below
is a graph comparing total government and public debt from 2000 and 2010 – Essay Writing Service: Write My Essay by Top-Notch Writer. It is
also notable to mention that in 1992 members of the EU signed the Maastricht
Treaty in which they pledged to limit deficit spending and debt levels. After
certain EU states failed to stay within these guidelines in the 2000’s in order
to reduce this deficit raised funds to side step guidelines, they did this
through inconsistent accounting, off balance sheets transactions, this too
could have contributed to the debt
crisis.
.jpg”>
Another main
factor of the Eurozone crisis was the global financial crisis happening at the
same time. In order to understand this
one must begin in the United States where the housing bubble which peaked in
2006 – Write a paper; Professional research paper writing service – Best essay writers had burst and caused the securities invested in real estate pricing to
record lows. Financial institutions
globally felt the impact of this “crash”, the global stock market slowed down
tremendously due to lack of confidence from investors and decline in amount of
credit available. This resulted in a number of European bank failures,
reductions in the market value of equities and commodities 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 that was
considered one of the worst since the Great Depression. The housing market
suffered the most particularly in Spain and France resulting in lingering
unemployment. Many European investors purchasing of U.S Government bonds in the
global capital markets, the value of the bonds plummeted with the housing
market and European investors were left to repaying the liabilities at full
price. Due to the complexity of in the globalization of finance an
international imbalance of trade also played a part in the European Sovereign
Debt crisis. The trade deficit in Southern European countries particularly
Italy and Spain affected the changes to labor costs, causing Italy’s unit labor
cost 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 unity between the
member states, the members do not have a common treasure to enforce regulations
but rather the taxation, expenditure etc is left in the control of each member
states sovereign government. Essentially this leads to countries picking and
choosing which rules they want to follow and which they do not, as can be seen
in the example of Italy and Greece. “Eurozone” is composed of 17 countries and
requires unanimous agreement for decisions to made, so when one country fails
to follow through on its share of responsibilities, it is very hard for the EU
to respond quickly and efficiently to the problem. All the countries become interdependent
because they share a common currency but they do not share the same budget
discipline, work ethics or political ntegrity. Anger had grown in the European
countries themselves with financially conscious countries such as Germany and
France seething at the governments of Greece and Italy.
.gif”>
Finally perhaps one of the most important reasons
why the global financial recession including the Eurozone crisis has lingered
is the lack of confidence by regulators, investors and the public. It was
falsely assumed that banks that had substantial holdings of bonds even if was
from a weaker economy would not be that risky but the bonds proved to be
extremely risky and banks were taking substantial losses. This loss of confidence is seen by rising CDS
prices which indicate market expectations. (See graph below produced by
Bloomberg)
.gif”>
Investors have serious doubts about law makers ability to
control and regulate, and since countries that use the euro as their currency
do not have their own personal monetary policy choices , solutions require an
effort from all member states.According to.wikipedia.org/wiki/The_Economist”>The Economist, the crisis “is as much political as
economic”,if banks fail, it
is unlikely the government will be able to fully respect their commitment, and
there is the possibility that they might abandon the Euro and revert to a
national currency; so deposits are safer in Dutch, German, or Austrian banks
than they are in Greece or Spain and investors are careful to be mindful of the
politics in these countries.
Effects on the economy of Spain, Italy and France
Spain
The Eurozone
crisis deeply affected the ecoomy of Spain till 2004 when political power
shifted, the main problem was Spain’s trade deficit, which was 10% of the
national GDP causing it to lose competiveness with its main partners. This
coupled with a high inflation rate and the housing bubble created a hostile
economic situation. House prices increased 150% increasing family debt. The
economy contracted in 2008 – Affordable Custom Essay Writing Service | Write My Essay from Pro Writers and it was officially announced to be in a recession
in 2009.
Spain also suffered an unemployment crisis, in
July 2009 almost 1.2 million jobs were lost and at the end of March the
following year the Spanish unemployment rate had reached 17.4% with almost 4
million people unemployed. In 2014: 2024 – Essay Writing Service. Custom Essay Services Cheap the Spanish government introduced a radical
new labor reform, which included flexible labor markets, contracts and labor
flexibility leading the unemployment gap to slowly decrease. The Spanish public
(government) debt was lower relative to total GDP than other EU members. Since
the Eurozone, the economy of Spain has seen fluctuations in its growth. In 2014: 2024 – Essay Writing Service. Custom Essay Services Cheap
the Spanish economy over 25% of the workforce was unemployed and the economy
contracted 1.4% until Q3 of 2013. However despite this international trade has
improved due to increasing exports and the growing number of tourists. In 2013
for the first time in 30 years Spain achieved a trade surplus.
Italy
Italy’s
economy is as diverse as its many political factions, Italy was one of the
countries hit hard by the great Depression and fascist government nationalized
large banks, and became known as corporatism.
Eventually social and political unrest led to economic failure and
throughout the 1970’s stagflation and stagnation became a huge problem in
Italy’s economy. Italy was gain hit hard by the crisis of 2007-2011. The
national economy decreased by 6.76% during the recession.
The Italian
public debt stood at 116% of GDP making it the second biggest debt ration 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
GDP remains 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’s largest and profitable fashion houses, making it the 7th
largest exporter. The agriculture,
industrial and appliance industries are also thriving in the Italian
economy. Despite the Italian economy’s
various historical struggles, the Human Development Index along with the Economist have rated Italy very high
in terms of quality of life, The
Economist gave Italy the world’s 8th highest quality of life
ranking. In the graph below I show
Italy’s GDP per capita PPP as opposed to other European nations including
France.
.gif”>

France
France has
one of the largest economies in the world, and is the second largest economy in
Europe. France’s economy similar to that of Italy and Spain suffered in the
global recession of the late 2000’s. Frances economy differs from Spain and
Italy in the fact that France has long been one of the world’s wealthiest
economies, consistently growing 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 French government debt is about 1,833 billion
Euros and has run a budget deficit every year since the 1970’s. France has been
downgraded in credit rating agencies like Italy in 2014: 2024 – Essay Writing Service. Custom Essay Services Cheap. France is ranked as one of the wealthiest
countries by multiples publications and according to the IMF has a per capita
GDP of $45,460. It is also ranked extremely high on the United Nations Human
Development Index and Corruption Index. Compared to Italy, corruption is very
low in France. In the Forbes global 500 France ranks 5th because it
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, Veolia
Environnement 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 d

.businessinsider.com/core-unit-labor-costs-in-germany-2011-11″>https://essays.homeworkacetutors.com/write-my-essay/businessinsider.com/core-unit-labor-costs-in-germany-2011-11
.economist.com/node/21556624″>https://essays.homeworkacetutors.com/write-my-essay/economist.com/node/21556624
.bbc.com/news/business-16290598″>https://essays.homeworkacetutors.com/write-my-essay/bbc.com/news/business-16290598
.economist.com/node/21536871″>https://essays.homeworkacetutors.com/write-my-essay/economist.com/node/21536871
.info/”>http://europolitics.info/
.cnbc.com/id/37207942/Could_Italy_Be_Better_Off_than_its_Peers”>https://essays.homeworkacetutors.com/write-my-essay/cnbc.com/id/37207942/Could_Italy_Be_Better_Off_than_its_Peers

Order | Check Discount