European Union and Economic Crisis

How does Economic Crisis Affect European Union and how Does EU Reacts

Introduction to the European Union and the Economic Crisis

It is a fact world wide that we are facing an economic crisis. There are many Countries inside European Union that can hardly respond to the values of the crisis. The whole commission has to Decide and act properly for all those countries that can hardly respond to the crisis. The depth and breath of the current global financial crisis is unprecedented in post-war economic history.

It has several features in common with similar financial-stress driven crisis episodes. It was preceded by relatively long period of rapid credit growth, low risk premiums, abundant availability of liquidity, strong leveraging, soaring asset prices and the development of bubbles in the real estate sector. Stretched leveraged positions and maturity mismatches rendered financial institutions very vulnerable to corrections in asset markets, deteriorating loan performance and disturbances in the wholesale funding markets. Such episodes have happened before and the examples are abundant (e.g. Japan and the Nordic countries in the early 1990s, the

Asian crisis in the late-1990s). But the key difference between these earlier episodes and the current crisis is its global dimension. ( )


A perfect storm. This is one metaphor used to describe the present global crisis. No other economic downturn after World War II has been as severe as today's recession. Although a large number of crises have occurred in recent decades around the globe, almost all of them have remained national or regional events - without a global impact. So this time is different - the crisis of today has no recent match. To find a downturn of similar depth and extent, the record of the 1930s has to be evoked. Actually, a new interest in the depression of the 1930s, commonly classified as the Great Depression, has emerged as a result of today's crisis. By now, it is commonly used as a benchmark for assessing the current global downturn. The purpose of this chapter is to give a historical perspective to the present crisis. In the first section, the similarities and differences between the 1930s depression and the present crisis concerning the

geographical origins, causes, duration and impact of the two crises are outlined. As both depressions were global, the transmission mechanism and the channels propagating the crisis across countries are analyzed. Next, the similarities and differences in the policy responses then and now are mapped. Finally, a set of policy lessons for today are extracted from the past. A word a warning should be issued before making comparisons across time. Although the statistical data from previous epochs are far from complete, historical national accounts research and the statistics compiled by the League of Nations offer comprehensive evidence for this chapter. Of course, any historical comparisons should be treated with caution. There are fundamental differences with earlier epochs concerning the structure of the economy, degree of globalization, nature of financial innovation, state of technology, institutions, economic thinking and policies. Paying due attention to them is important when drawing lessons.

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Responses to Crisis

In a single market and a huge trading bloc like the EU, coordination of national economic policies is important. Through such coordination, the EU can act with speed and consistency when faced with economic challenges, as the current economic and financial crisis. Sixteen countries have even one step further by adopting the euro currency. The framework for cooperation in economic policy is Economic and Monetary Union (EMU), whose members are all EU countries is a framework within which countries agree common guidelines on important issues of the economy. The final result of the cooperation is more growth, more jobs and higher level of social protection for all. Moreover, this cooperation allows the EU to respond to global economic and financial challenges in a coordinated way. The EU as a major trading power, is more resilient to external shocks and, thus, can effectively address the various economic and financial problems. The EU has faced in a coordinated way the current financial and economic crisis, from the first moment occurred in October 2008. National governments, the European Central Bank (ECB) and the Commission work together to protect their savings to maintain the flow of credit at affordable terms for businesses and households, and to establish a better system of global management of the financial sector. The aim is not simply the restoration of stability but to ensure that the conditions to re-launch growth and job creation.

So far, EU governments have placed more than 2 trillion for the rescue effort of their economies. European leaders have coordinated their interventions, providing support and allowing banks to grant loan guarantees. The EU also increased state guarantees for private savings accounts to 50,000 euros. The use of the euro as common currency in many European countries worked very positively during the crisis. Helped the EU to react to the global credit crisis in a coordinated manner and provide greater stability than would happen without it. For example, as the ECB could cut interest rates throughout the euro area (instead of each country sets its own exchange rate), banks across the EU can now borrow or lend to each other under the same conditions .

The euro is used daily by more than 60% of EU citizens Having a single currency was a win-win for abolished the cost of converting currencies at leisure or business trips within the eurozone, abolished or significantly decreased in almost all Where the cost of cross-border payments; consumers and businesses can easily compare prices, thus fostering competition.

Participation in the euro zone is a guarantee of price stability. The ECB sets the key interest rates at levels designed to keep medium-term inflation in the euro area below 2%. It also manages the foreign reserves of the EU to intervene in currency markets to influence the euro exchange rate.

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Europe, mistakes and the economic crisis

The crisis was born on August 9, 2007, when the European Central Bank (ECB) introduced 95 billion liquidity to markets, while the BNP Raribas freeze three investment funds because of subprime had value. The injections are slightly stimulated the patient and the ECB has gained credibility. Apart from the monetary policy should, however, warned governments to take steps to eradicate the evil and to prevent the liquidity crisis be turned into a solvency crisis. Then the ECB was slow to cut interest rates. When in March the European Parliament held a debate devoted to these issues in preparation for the European Council in April, the former Irish Finance Minister Charlie Mc.Creevy had preferred to keep racing ... Also the perception of Manuel Barroso's role is questionable. Rather than enshrine it in the spirit of community spirit, arrested him as a dead leaf which is led and borne by the wishes of the Council: the Commission should propose only what Member States want.

The organization of the Commission creates a blind spot in understanding this crisis. The macroeconomic and related issues with the markets depend on two different committees. In the European Parliament in October 2006 calling on the Commission "to pay more attention to the effects of market behavior on the macroeconomic situation in the euro area.

Because there had to break the morale of the household, mobile motorized development, and because it was easier not to go ahead, the governments leave the ECB to intervene alone. Adopt them journey to the lessons of the crisis are not dealt with the pollution of subprime, the address of which is limited to calls for transparency from banks. But this is contrary to the rules of the market because it requires “players” to risk their reputation. Transparency could be only by on-site inspections, for which nobody had the means.

In the spring the International Monetary Fund released figures decline in growth in Europe while car sales fell in Germany. In the holy alliance of the European executive and the ECB decided that the data were under American influence and too pessimistic. By optimizing the expectations we had in denial of reality. After a serious error assessment of the Bush administration ran away evil and rotten egg of subprime cut the mayonnaise in the world economy have serious economic and social consequences.

The decision to leave at the Lehman collapse Vrothers on September 15 caused a systemic crisis marking the death certificate of the Reagan-Thatcher era.

In Europe-in this new phase of the crisis-the first reflex was to rescue the Irish, which has decided to guarantee all deposits of banks. Angela Merkel initially denied any plan to support the European banking sector. After Nicolas Sarkozy left alone against the German refusal, Gordon Brown presented his own plan and moved to the Eurogroup. As a former Finance Minister of the main economic spot of Europe, he knew very well what he was talking and was able to combine the political imperative for action control mechanisms.

Nicolas Sarkozy, who has made Jean-Claude Trichet in the class of head of state or government, seemed to be trying to play a kind of changing the State Monopoly French capitalism, industry and the media depending on the mood. This was perhaps another reason why the banks refused the first version of the plan and forced the state to offer loans without taking any involvement. We thus present a massive plan to support banks without exchange intervention to long-term strategy. There is also a risk that the pressure for reforms to evaporate with a new relative stabilization of markets and argued that any significant change endangers the fragile economies. Finally, the European response to banking crisis will be in parallel with national plans. An ambitious Commission will undertake to lead the implementation of these projects to be used in a European strategy. Europe can provide the best, the ability of the default rules, is the soft power of the modern era that is so necessary by globalization. For this reason the Commission should rediscover the nature and take-back initiatives is one of the great challenges of the next European schedule.

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Economic crisis leading to "relaxation" of EU rules on deficits

The 'relaxation' of the rules on deficits under the Stability Pact (up to 3% of GDP) in fact go the European governments, as the financial crisis requires more government spending to avoid recession. Although the head of the Eurogroup Jean-Claude Juncker said at the meeting of four European leaders in Paris on Saturday that "the Stability Pact should be respected" in its entirety, is a common belief within the EU that will be tolerated a-temporary-breaching the 3% of GDP as the primary objective in this very difficult international situation is the stability of the system.
Officially, most EU leaders insist on fiscal discipline is, but everyone knows that without government intervention the situation will deteriorate and European economies will slip into recession. The 'culture' that prevails in Europe, captured the French president Nicolas Sarkozy, saying that "the implementation of the Pact should reflect the exceptional circumstances where we are." The "exceptional circumstances", according to international organizations, the most serious economic crisis of the Great Depression of the 1930s. This issue will be addressed by the European finance ministers Monday (Eurogroup) and Tuesday (Ecofin) in Luxembourg. The ministers will discuss the crisis and will refer to measures taken in their countries to reduce the impact of the credit "suffocation". The EU prefers assistance "in case" and, for the moment at least, does not discuss the possibility of a common reserve fund (suggested and took back then N. Sarkozy) to rescue the banking and general corporate financial industry tested by the crisis.

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