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The_Eurozone_crisis

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Question;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. 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. 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.;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 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, 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.;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);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 toThe 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 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 2012 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 2012;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.;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 2012. 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;Cited;http://www.businessinsider.com/core-unit-labor-costs-in-germany-2011-11;http://www.economist.com/node/21556624;http://www.bbc.com/news/business-16290598;http://www.economist.com/node/21536871;http://europolitics.info/;http://www.cnbc.com/id/37207942/Could_Italy_Be_Better_Off_than_its_Peers

 

Paper#56897 | Written in 18-Jul-2015

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