Eurozone Debt Crisis Analysis

This assignment requires you to delve into the Eurozone Debt Crisis, examining its root causes and analyzing its multifaceted impacts on global trade and economic growth. Explore the various responses implemented through both fiscal and monetary policies by the European Central Bank and other institutions. The analysis should draw upon provided resources for a comprehensive understanding of this significant economic event.

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GLOBAL BUSINESS AND ENVIRONMENTAL RISK
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Contribution Factors to the European Economic Crisis
The European Economic crisis came about as a result of various factors. Noteworthy, the
banking industry in European countries faced losses due to the bad debts in the United States of
America following the credit crunch .Following the insolvency of most financial institutions, the
financial situation of most Europe based countries closed down thus contributing to the overall
European crisis. Further, recession boosted the financial crisis in Europe in the sense that there
was no financial borrowing and low investment rates thus the economic downturn in
Europe(Pettinger,2014).Moreover, the inability of lenders to pay back their credit facilities and
the decline of housing prices led to the incurrence of losses by most European banks thus the
economic growth decline.
Additionally ,the increase in sovereign bonds yield resulting in huge budget strains at the
national level contributed to the European economic crisis .Particularly ,Greece s foreign debt in
the year 2009,stood at 300bn Euros .Foreign investments in Greece attracted higher bonds and
interest rates thus the exposure to bad debts for most European states which prompted the
financial crisis in the region(Krupper 2016).Moreover, most banks in the European region
considered saving rather than offering credit facilities amounting to substantial strains on the
liquidity of financial institutions in the region. With the low investment rates due to high national
debts nd high and high-interest rates on loans, most countries experienced national budgetary
deficits and low economic activity.
In addition, the inadequate structural deficits in most of the European countries may have
contributed to the financial crisis n the region. Due to the insufficient financial structures ,most
countries were unable to deal with the slow economic growth rates thus succumbing to the

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economic downturn propelled by the financial crisis(Investopedia 2017).Most of the European
countries were ill equipped to cushion themselves against global recession and other economic
downturns which in a way expanded the crisis instead of containing or cushioning against it.
Further ,the high-interest rates on credit facilities curtailed many countries from investing since
most countries in the region were saving their financial facilities as opposed to lending .Also, the
countries with huge national debts faced high-interest rates which discouraged them from
seeking out financial facilities from the international financial bodies such as the European
Central bank and the international monetary fund (Investopedia,2015).
In addition, the unforeseen risk of underpricing in the house mortgaging system in the
United States of America was an important trigger to the European financial
crisis(Stark,2009).Notably,the bankruptcy of the Lehman Bank,the rise in asset prices and the
sudden credit growth rates are some of the major contributing factors for the European crisis.In
addition,there was the overall global imbalances which affected the Eurozone market.Due to the
insolvency of most financial institutions ,there was no liquidity to further borrowing thus the
decline of the financial sector in the European union countries(Buti,2009).The European
economic crisis is directly linked to the global financial crisis and the subprime house
mortgaging bubble in the united states of America.
Policies implemented by the Government and the Impact on the Economy
Predominantly, monetary and fiscal measures and policies are implemented to regulate the
economy. Also, the application of non-standard liquidation operation greatly helped increase the
lending capacity of financial credit facilities .In addition ,policy rates cuts were incorporated to
encourage borrowing as opposed to saving to stir economic activity and investment for economic
growth in a bid to overcome the economic downturn in the European countries.

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(Stark,2009).There was the implementation of automatic stabilizers into various European
countries economies .Expansionary fiscal policies were also implemented to stir economic
growth rate in the Eurozone .Typically, discretionary fiscal policies are meant to reduce tax rates
and government expenditure in the case of economic downturn whereas expansionary fiscal
policies are meant to increase expenditure in order to create employment opportunities.
Predominantly,Most European countries implemented such policies to cushion their
economies against further financial and economic turmoil. Among the monetary policies
implemented included inflation targets, price level targets among other policies. Usually,
monetary policy is preferred because expansionary policies stimulate investment and encourage
consumer spending which is vital for economic activity and growth. Also, through monetary
policy, money can be injected into the economy through quantitative easing .However, there are
no sure ways of knowing whether the monetary monopolies will achieve the desired result
(Green gabage 2015).Fiscal policies are considered flexible and reactionary to economic changes
thus has high chances of achieving the desired result .Further, through taxation unhealthy habits
or enterprises can be curtailed through fiscal policies .Additionally ,fiscal policies effects are
promptly felt thus can be a huge relief for a pressing economic situation(Lombardo,2015).
However, fiscal policies are prone to create national budget deficits and the implementation
of such policies are dependent on political will. Government intervention during the crisis was
vital in the sense that it was able to contain the negative effects of the European economic crisis
effects. Through government action, interest rates were reduced, bank liquidities restored,
inflationary pressures contained through monetary and fiscal policy.
Impact of policies

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Following the European economic crisis, it was imperative for the European governments to
take prompt action to contain the situation hence most governments opted for fiscal and
monetary policies. Furthermore ,liquidity managing policies and measures have been
implemented to curb the unfavorable inflationary pressures in the Eurozone(Stark,2009).The
impact of these monetary policies has been reduced interest rates on financial credit facilities and
stability of prices. Further, sanity has been restored in the banking sector of the economies in the
Eurozone due to the stable liquidity levels of the current banking institutions in the
region .Through stabilized banking liquidity, borrowing has resumed thus prompting investments
to which economic growth is imminent .
Majorly,With the stabilization of pricing, investor confidence is slowing returning to the
Eurozone thus the possibility of more foreign direct investment opportunities leading to
economic growth rate.Also, inflationary pressures are slowly dying down which is a sign of
controlled inflation through monetary and fiscal policies. Further, a safety net was set up to
overcome the effects of the crisis under the European Stability Mechanism which offered credit
facilities to its members (European Union,2017).In addition , a treaty on the regulation of
national debt and deficits was enacted and adopted by the European countries to prevent a
reoccurrence of the crisis through the establishment of rules and recommendations on handling
public debt ,expenditure and national budgetary deficits. bubble asset and risk monitoring
policies were strongly advocated for and penalties stipulated for cases of breach.
Discretionary fiscal policies are responsible for the increase in the gross domestic product
index in the Eurozone (Coenen ,Straub et.al,2012) Moreover, the implementation of
expansionary fiscal policies is responsible for the slight economic growth rates in the European
countries.

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Explain the role of the failing banks in the European Economic crisis.
Before the economic crisis, most of the major banks had low liquid assets hence most of
them could not offer loans to struggling institutions .During the crisis, most major banks in the
European union region, especially the Central bank implemented monetary policies and other
measures and policies to revive the financial economy in its jurisdiction .New policies were
formulated and implemented to control inflation ,interest rates in the various
economies(Liikanen,2013).Central and federal banks were given broader regulatory and
supervisory powers to restore the financial stability of money in the economies. Most of the other
banks had to resort to their federal or central bank due to the financial difficulties during and the
onset of the crisis thus the implementation of the policy rate.
Further the European Central bank exchanged euros to dollars which were offered to the
struggling banks in Europe under long maturity dates. Also ,the range of collaterals were also
expanded to increase the borrowing capacities of the struggling banks .Through further monetary
and fiscal policy, slowly by slowly, the liquidity of financial markets ,interest rates and inflation
rates was restored .Notably, the role of the Central bank expanded during the Eurozone economic
crisis to involve additional responsibilities and policies .Bond buying ,use of negative interest
rates were implored to combat the struggling banking system .Also the European Central Bank
was tasked with the central duty of regulating and supervising financial markets in the
region(Macbride and Alessi,2015).Specifically, the European Central Bank partook in buying
government bonds which wasn’t in its traditional role description.

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The bank implemented a security market plan to reduce credit costs for its member states.
Also there was a bond initiative through the outright monetary transaction to deal with
government bonds in the Eurozone. Further the European central bank established a banking
union .Through quantitive easing,the inflation rates were reduced.Most national European banks
were under the supervision and regulation of the European Central Bank which sought to
monitor and implement various policies to help restore the liquid of national and federal banks to
their original glory .Through the various mentioned ways the European central bank was able to
stabilise policy rates,inflation and interest rates of financial institutions through which most
European countries in the union have recovered from .Also these actions,economic activity has
been stirred as borrowing is possible and investments likely to stem from stability of financial
institutions.
Economic Consequences of the Crisis
Predominantly, there were slow economic growth rates during and immediately after the
crisis .Additionally, there were high unemployment rates due to the decline of businesses due to
the economic downturn. Also, due to the harsh economic times, there were high inflationary
pressures brought about by the financial crisis .Due to the fact that there was little capital in
circulation, most financial institutions lacked the liquidity to offer loans to revive struggling
industries and promote investment thus there were high unemployment rates (Kapoor and Coller
2014).Following the crisis,there were high unemployment rates,decline of industries,insolvency
of some enterprises,low business confidence towards most European countries,high inflation
rates and low gross domestic product due to low economic activity.

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Further, there were high-interest rates on financial credit facilities due to the scarcity of capital
following the onset of the crisis. The crisis led to substantial reduction in the gross domestic
product of most European Union countries due to the reduced rate of international trade and low
economic activity .Also, there were low gross domestic product growth rates if any due to the
fact that there were harsh economic times to conduct trade and venture into investments. By and
large, there was decline of some industries due to the limited capital flow and harsh trading
environment marred by high-interest rates and inflationary pressures .Largely, Government
revenue for most of the economies reduced due to the fact that there was reduced spending and
more saving during the crisis period(Beker,2013) .Additionally ,there were high- interest rates
for credit facilities which discouraged borrowing. Taxation revenue significantly reduced due to
less consumption habits during the European economic crisis.
Impacts on Europe and the world
The fact that European countries are trading partners to most countries in the world means
that these countries were affected in one way or another. Noteworthy ,due to the economic
crisis ,most countries have lost investor confidence in European countries thus the unlikelihood
of full commitment for investment or credit facilities(Knight N .d).Notably, following the
economic crisis in Europe ,there was slowed economic growth rate due to the fact that there
were no investments to create employment opportunities and banking institutions were unable to
offer credit facilities due to lack of liquidity .Some industries declined following the harsh
economic times leading to high rates of unemployment across European states(Hanan,
n .d).Youths were the most affected in the unemployment gap in Austria and Netherlands.

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Due to the fact that European countries are involved in international trade, global trade has
been disrupted by the European economic crisis. The volume of international trade reduced
significantly following the crisis and is slowly recovering. In addition there’s need to restore
investor confidence by the European countries to its international trading partners .Following the
European financial crisis, other global countries have adopted structural and institutional
frameworks ,risk monitoring techniques to help abate economic downturn as the one experienced
in European countries .Further, there is reduced foreign investment by and in the European
countries due to the slow economic growth rates following the financial downturn(Na ,Minjun
et.al N .d).Due to the crisis ,the value of foreign direct investment has reduced in most countries.
Conclusively, the economic crisis was caused by harsh economic times characterized by lack
of liquidity of banks, high national debts and high budget deficits ,high-interest rates ,high
inflationary pressures which led to low economic activity in the Eurozone ,high borrowing rates,
it can be said that the European economic crisis had major negative impacts on European
nations and the world as whole. However ,the European economic bank ,federal and national
banks through monetary and fiscal policies have managed to stabilize the financial market
situation thus favorable interest rates and low inflationary pressures. Despite the slow recovery
rate of economic activity in most economies these s hopes that the value and volume of
international trade will continue to grow steadily.
References

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