Answer To: What is the 'euro crisis' and can the EU survive it by Ayush Sharma Submission date: 04-Jun...
Shashank answered on May 28 2020
Essay on Euro Crisis
Introduction
In the past few decades, the world financial system was seen getting collapsed by the world which got triggered by failure of major economies of the world. Something as big like this only happened after Great Depression in 1930s and now in 2008, history repeated itself. The primary reason for the crisis to begin might have originated from some other place like banking crisis in USA and have got a subprime effect on others.[footnoteRef:1] It is evident that this exposed the weak structures of European growth and Euro area development model, the basis of which has been debt financing of public and private expenditure and investment. The crisis situation was never expected considering the enthusiasm of all European nations to circulate Euro in 2002, which was remembered as one of the historical moments in history of European Union.[footnoteRef:2] It was understandable considering no specific measure as big as this has been taken for integrating these nations together which has the same potential and tied together to face the fate whatever it may be. The euro crisis is the prime example to understand the situation and provides ample evidence for the same. The leaders of the European union and global financial markets became more alert after the drama of potential default was seen by members who were highly indebted before. The problem became contagious and dragged other economies on the similar path of failure which makes this crisis one of most serious in the history of union. The major economies of the Europe which supported other small economies posed a serious threat, the currency Euro which was launched in 2002 and was marked as an achievement also became vulnerable to survive.[footnoteRef:3] The key stakeholders which made an impact in this situation were the European central bank and other banks which monitored the cause of problem and tried solving them. Various aspects are identified which are linked to the big crisis and one factor is not the one to blame. [1: Crotty, J. (2009). Structural causes of the global financial crisis: a critical assessment of the ‘new financial architecture’. Cambridge journal of economics, 33(4), 563-580.] [2: Jonung, L., & Drea, E. (2010). It can’t happen, it’sa bad idea, it won’t last: US economists on the EMU and the Euro, 1989-2002. Econ Journal Watch, 7(1), 4-52.] [3: Ecb.europa.eu. (2018). [online] Available at: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1532.pdf?15e4ed19aa4f4a50db0b03741ed32e7b]
Time before the crisis
It was year 1999, when 11 major economies of Europe decided to change their home country currencies into a single and common currency, known as Euro. The parameters to join the union were set to meet criteria like size of national debt, rate of interest, inflation rates, budget deficits and exchange rates. The decision to join the union lies with the nation as England, Denmark and Sweden did not join it even after qualifying for becoming a member.[footnoteRef:4] [4: Bomberg, E., & Peterson, J. (1998). European Union decision making: the role of sub-national authorities. Political Studies, 46(2), 219-235.]
Though there was some resistance at the initial phase, the new currency under this project was accepted by the people of Europe. The official statistics recorded that consumers complained about prices of day-to-day goods got increased from what it was before the formation of union and inflation was perceived to be higher than before. However, the policies that were implemented helped in delivering a record of price stability in the eurozone and inflation rate got controlled with less than 2 percentage points.[footnoteRef:5] As the government and people got comfortable with the use of currency, the process become much easier and the method became very convenient. Especially for outsiders like tourist, they enjoyed the ease of using same currency in all the nations who are part of European union. Other benefits that became prominent were increase in trade among the members of Eurozone and also outside of eurozone.[footnoteRef:6] For countries who were not doing economically very well saw a boost in their GDP. Countries like Austria, Germany and Finland started growing at a rate of 6 percent or more. The growth started making it impact in other economies who were suffering from slump before. It became obvious that interest generated to become a part of union for other nations who were still not part of it. The economy became smoother for many countries. The rate of interest of loans went down specially those which suffered from high cost of attracting funds before the formation of euro zone. This was due to ease of cash flow among the nations. The rise in availability of cheap credit made people accept huge funds for starting their own businesses. One thing that was missed during this time was an opportunity to revive their economies back. The new currency gained popularity among investors outside Europe to diversify their foreign reserves and as a result the prominence in international markets slowly grew.[footnoteRef:7] The situation seemed profitable for other economies in the world as the second reserve currency came into being. [5: Dnb.nl. (2018). [online] Available at: https://www.dnb.nl/en/binaries/1605458_OS14-3_ENG_v9_tcm47-346543.pdf [Accessed 15 Jun. 2018].] [6: Alasdair r. Young, 2004. The incidental fortress: the single european market and world trade
] [7: Ecb.europa.eu. (2018). [online] Available at: https://www.ecb.europa.eu/pub/pdf/other/eurointernationalroleen.pdf?80b572ebfb7ca539bd125a951742a502 [Accessed 15 Jun. 2018].]
The inception of crisis
The sceptics about introduction of Euro became silent after seeing the boost in economies it was causing. But they were consistent about the thought of the collapse of currency might happen which will result in sudden downfall. The reasons behind this can be cited as the currency lacked the overview of federal framework and also the important institutional structures that helps in dealing during the tough times. The safety net was missing. In cases of imbalances among the member states, the central government or central budget formation was missing which generally exist in normal cases. This implied that putting trust in the current rules with the institutional structures present, economic crisis can put the nations in a situation of heavy indebtedness. The architecture was not strong enough to fight against falling banking and financial systems like in case of Greece. These flaws were more exposed when the world was struck with 2007-08 financial crisis followed by 2009 economic crisis. The picture became clearer when sovereign debt crisis occurred in 2010-11.[footnoteRef:8] The trigger was the fall of Lehman brothers after which intervention was made by ECB to avoid complete meltdown by pumping huge funds in the economy. In Europe, it was Greece which was first stuck with the meltdown which was later followed by Ireland, Portugal, Spain and later by Italy.[footnoteRef:9] These countries were suffering from a fear of financial defaults the sovereign debt rating had...