Implications of Troika in European Economic Crisis

This report discusses the implications of the global economic crisis on countries like Ireland, Greece, and Spain. It focuses on the role of Troika in providing financial support and guidance to these countries. The report also analyzes the interventions and measures taken by Troika to stabilize the situation. The central research question revolves around the economic impacts and the need for financial support in these countries. Sub-questions explore specific aspects such as the effect of increased VAT in Ireland and the impact of wage cuts in Spain. Overall, the report provides insights into the European economic crisis and the efforts made to recover from it.

Table of Contents
Preface
Introduction
Central problem
Aim of the report
Sub questions
Ireland
Troika (Ireland)
Greece
Troika (Greece)
Spain
Troika (Spain)
Housing scheme of Netherlands
Conclusion

Lessons learnt
Literature
Preface
This course is mandatory and essential in the field of business management and cannot be
ignored, economics study provides valuable information for making decisions in everyday life.
Accounting and economics are involved in dealing with financial matters and this course will be
important to my future career especially by understanding demand and supply more clearly and
more detailed than I did during the bachelor’s degree in accounting. Throughout the module, I
took an overview of the global economic structure through many of the discussions and
examples I have shared and discussed as group members during the class. To be honest,
managerial economics was not one of my favorite subjects during my educational career. But to
be fair, it helped me to understand many of the different theories and regulations that have taken
place in the world markets. My expectations were to understand in depth how countries trade
between each other, what measures governments take in such cases and how people may be
affected if the price on goods increases and what effects it may have. In general, I gained
valuable information, especially in understanding the European market through the discussions
and examples that were raised by Prof. Bert. Therefore, I would like to thank Prof. Bert for his
valuable and useful information.
Introduction
The implications of the global economic crisis are due to the United States financial crisis in
2008, which has affected many countries including Greece and economic influence still expects
Greece to default on its debts. (Joseph N. Lekakis & Maria Kousis,2013) The financial crisis
with the economic recession will have a big impact on countries within the European Union as
well as countries within the Euro zone. After the crisis, there had been a parcel of turmoil inside
the economies of the different European countries. It is known that countries such as Greece,
Spain and Netherlands have been greatly affected by the crisis and the International Monetary
fund in conjunction with the ECB will organize a mechanism aimed at providing financial aid as
well as guidance to recover from this crisis. Countries such as Greece, Spain and Ireland are
facing a real crisis in the high prices of living in these countries. Therefore, they had to enroll in
a program that would provide them financial support. So, the largely influenced countries will
receive mutual assistance from the International Monetary Fund and the European Central Bank
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to recover from this crisis (Katsanidou & Otjes, 2016). In general, Euro zone countries are no
longer able to borrow money as they were previously and can no longer repay their borrowed
debt. Hence, the European Union was not able to reduce this large problem in the economy
except with the help of the International Monetary Fund. European banks have not been able to
deal with this problem in addition to facing liquidity problems. (Richard & Baldwin,2015) The
following paper will be utilizing the literature for analyzing the financial crisis in Europe and the
combined efforts will be making a difference within the stabilization of the circumstance return
to normal.
Central Problem
Troika is a body of the European Commission, the European Central Bank (ECB) and the
International Monetary Fund (IMF). This body will generally control the circumstances that have
taken place because of the huge financial crisis that happened throughout Europe and its huge
impact within European economies. This specific joint body had been made for saving the
adversely influenced countries such as Netherlands, Spain and Greece by offering them with
financial support to the governments and the different institutions which were at the brisk.
Therefore, the Troika loans have been profiting Greece and Spain on the huge scale. A few of the
countries were moreover expected for modifying their whole economies in an effort which
would also help in rebuilding their wage among the other changes.
Aim of the report
The objective of the report is to create an understanding the different forces of the demand and
supply that will be determining the market structure, the worldwide misery at that time and will
be influenced on the global economy. The research will be tending to the interventions executed
by the different global organizations for dealing with the economic crisis with the different steps
of the Eurozone in primary countries specifically Ireland, Spain, Greece and Netherlands. The
central research question is:
What were the various economic impacts in the situations which led to the continued need or the
financial support for Spain, Greece and Ireland?
The sub questions
1. What was the effect of the increased VAT of Ireland on the economy of the country in
terms of production?
2. What are the effects of the Greek government cancellation of the transport license?
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3. What happened when there was pay cut in Spain on the employees of the economy of the
country?
4. What happened when the liberalization of the housing market took place in Netherlands
and how will it affect the economy of the country?
5. Was the Netherland’s rule for the donation scheme fair according to the economic
principle?
Ireland
The Irish government was spending heavily in addition to the Irish banks that were known to
fund during the middle of the property bubble, which led to an increase the debt of Ireland
significantly. Therefore, the Irish bank lost more than hundred billion euros. Most of the loans
were given to the property developers and the homeowners which were show within the property
bubble, the burst took place in the year 2017 and the economy collapsed at 2008 and the
unemployment rate rises from four percent in the year 2008 to fourteen percent by the year 2010.
This resulted within the rise of shortfall of more than thirty percent of the gross domestic product
(GDP) in the year 2010. After the year 2011, the European leaders will be concurring to cut the
interest rate which Ireland had been paying on the European Union bailout loan from more than
six percent and after that the loan doubled. (Katsanidou & Otjes, 2016). Because of all these
reasons, the government concurred for reducing the budget deficit to below three percent by the
year 2015. The economic crisis within the Eurozone saw several economies within the region to
plunge into complete financial crisis with the bank and governments being the most victims of
the whole crisis. When the bubble burst in 2008, many companies could not pay off their debts
and many companies ended up bankrupt. (Mark Broad, 2013)
Intervention by Troika
Since the economic conditions within the Eurozone begun falling apart, the formation of Troika
took various steps for advising the influenced countries on the different steps.
A. Ireland
The 26 percent increase in value added tax (VAT) by the Irish government is a major change,
which will have positive and negative effects. For the positive effect, the positive effects of the
increase in value added tax can be seen as leading the efforts to create a huge amount of income
and hence the increase in value added tax will help in the total income of the state (Raudon &
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Shore, 2018). The negative effects lie in, when there will be rise in VAT it can lead to inflation
which results due to rise in prices and decrease within the real amount of the products and
services. Increase in VAT can be seen as regressive tax where huge proportion of the income
than the high one (Ongena, Popov and Van Horen, 2016). As a result of the income impact the
spending pattern will be changing and so there will be a tendency for increasing the saving rather
than spending which can lead to low demand.
Figure 1 Impact of tax on Ireland
(Source: Parkin eleventh edition.)
Greece
Greece economy has been performing well for a long time in the middle of the 20th century and
was characterized by high growth rates and low public debt. In addition, it was the fastest
growing economy in the Eurozone. However, when the economic crisis in 2007 and 2008 was
badly damaged, Greece has been hit hard since of its presence of primary industries of shipping
and tourism. These two industries were very sensitive for the changes within the business cycle.
(Katsanidou & Otjes, 2016) The debt kept on extending as the government had to spend
intensely for keeping the economy working, the borrowing rates for Greek also begun rising with
the 2009 budget shortage. By the year 2010, the country was unable to borrow anything from the
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markets due to its large debts. The crisis within the year 2007 seen a huge growth in the savings
which had been benefit to the potential investors for the investment, that year saw a huge rise in
the global saving which had been caused by many of the high growth developing countries
which known to enter the worldwide capital market. Investors are known to get to the assortment
of sources of capital where there had been a huge rise in investments beside bubbles cross
different sectors within the global market. Due to bursts of housing bubbles to the banking
industry in Europe, the financial crisis has occurred in Europe. Where the cost of assets has
fallen below core values. Because of the current system, truck drivers pay the government up to
200,000 euros for the license and the drivers were on strike for six days. (Robert Stevens,2010)
B. Greece
Ireland has increased the value added tax (VAT) on products and services, but Greece has chosen
different techniques, known as the monopoly markets. Greece has abolished the license for the
transport of citizens. Therefore, the different impacts of the moves take place as an expansion of
demand. The alter within the quantity of demand takes place when the quantity demanded of the
item will be changing as a result of change within the price while keeping the other factors
steady. This approach will be having a positive impact on the economy of the country, it will
help open other ways to expand taxes when different sectors will be booming when there will be
development within the institutional revenues of Greece it will help in translating a rise of the
revenue for the government. The revenues will be collected by the Greek government which will
also help the service under the long shortage in order to pay what the country owes to Troika, so
we can say that this will be empowering people for investing them in the transport industry that
will be improving the street networks and infrastructure of the country (Bauer,2018). The growth
of the industry will be making a difference within the creation of more occupations and will help
in gaining the government revenue, it will be also motivating the foreign investors who will be
seeing Greece as an appealing location where commerce will be very simple. Moreover, the
investors will be choosing for helping them to bailout the county by buying treasury bonds for
guaranteeing the investments inside Greece. The government and the citizens will be benefitting
them from canceling the transport license fee.
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Figure 2 Monopoly market structure
(Source: Parkin eleventh edition.)
Spain
Compared to other countries Spain was suffering from a relatively low level of debt among
developed economies which took place before the crisis. The public debt to the gross domestic
product (GDP) in 2010 was more than 60 percent. Thus, debt was avoided by increasing
revenues from the housing bubble, it made a difference to accommodate the amount made the
Spanish government spending and investment without the accumulation of debt. When there will
be bubble burst, Spain had been known to spent huge amount of money on the bank bailouts, and
the bank bailouts together with the economic decline expanded the shortage of the country along
with the debt levels. It driven to a substantial minimizing of the credit rating. In arrange to build
up the financial markets, the government will be showing the different measures, the economic
downturn together with the bank bailouts will be increasing the deficit of the country beside the
debt levels. Monetary practices need a regulatory structure, but monetary practices in the euro
area lacked the sufficient organizational structure of the monetary system among different
countries. Therefore, the banking system in Europe came under examination and inspection in
order to maintain positions in the European market economy. This was accompanied by the huge
capital battle to the Eurozone in solid economic stabilities from those that had begun witnessing
various financial crisis which was the most cause of the total breakdown in countries like Spain,
Greece and Ireland. The Spanish government has instituted strict financial measures and reforms
in the labor market, including wage moderation and increased employer flexibility and the
restructuring of banks has contributed to reduce loans. (David Lipton,2018)
C. Spain
The Spanish government will reduce wages by 10 percent over the employed citizens (Beltratti
and Stulz, 2015). With salary cuts, the proposed disposable income of Spain will be diminished
and will be directly influencing the market demand. After this, the demand will be shifting to the
left showing a new demand. When the price will be decreasing from Ph to P1, the quantity will
be of less amount and this will result the equilibrium to decrease as shown within the curve and
the supply will be the same. For instance, the price will be 1 instead of 1.5 and the quantity will
be 6 rather than 10. When wages will be cut it will be harming the domestic consumption it will
be influencing the growth (Baumol. and Blinder 2015). The government and the citizens will be
losing as long as the utilization pattern will be lowered the government will be failing to
optimize the revenue generation of revenue for running the economy. Thus, it can be said that the
government will be benefitting within the short term and will continue to develop since it will cut
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off the wage bill. The citizens will be losing due to the reality that a common pay cut will be
reducing the salary. The debt crisis of Europe within the great recession around the 2009 was
characterized by the high government structural deficits with the huge amount of debt levels
(Manuel B.Aalbers, 2008). When there will be negative impact of the incredible recession, there
will be poor banking system who had suffered huge scale losses where most states in Europe will
be safeguarding out the influenced banks. To battle the crisis a few governments have been
centering on increasing the taxes with lowering the expenditures which can be contributing to
social unrest (Alan & Mark,2015).
ph
p1
Figure 3 Fall in demand
(Source: Parkin eleventh edition.)
Netherlands
The Dutch economy is in good health even though its economic potential has not been fully
exploited, in 2016 growth was recorded at 2,1% and the same growth rate is expected in the
following year. (National reform programme,2017, p.4) Public policies are one of the
fundamentals that contributed to the formation of the Dutch housing market. Direct and indirect
government intervention in the housing market and interest rate cuts led to problems that had
negative effects on the Dutch economy. The liberalization of the housing market had been picked
by Netherlands by limiting the mortgage interest reduction. The deductible interest amount
€10.000 where the rate of deduction will be dropping to € 5.000, - per year per household.
(Windy & Andreas, 2012)
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Figure 4 (Source: Parkin, eleventh edition.)
The prices of the housing will drop as a result of increase in the supply. In order to limit the
mortgage interest deduction in Netherlands, the interest rate will be shrunk. Because of that,
when the rates by the central bank will be cut it will mean that there will be reduction within the
monthly mortgage repayments of the individuals where repayments will be changing (Ongena,
Popov and Van Horen 2016). The mortgage interest installments are known to decrease from €10
Trillion to €5 Trillion per year within the economy of the specific country.
Housing scheme of Netherlands
As a result of the huge economic crisis the cost of the housing known to have dropped by more
than twenty percent. For stimulating the housing market, the government will be showing the tax
free donation scheme, and by this particular case parents within the year of 2014 will be giving
the tax free sum up to € 100.000 to their children. The amount at that point can be utilized for
renovation of the houses or for bringing down the mortgage amount but only the rich people will
take the advantage of it which is unfair. The donation plan was known to be very popular
(Baumol and Blinder 2015). According to the fairness in economic principle, it can be either fair
or unfair. The scheme can be treated as fair and reasonable since they have been forced when the
price of the housing market dropped. This specific scheme of tax free amount was considered as
the arrangement for recapturing the portion of their loss on the property (Schiavo and Türk,
2016). However, the result will not be fair in some cases because the advantage has only been
accomplished for the housing owners markets. Therefore, people who have less income will not
be able to buy houses and not everybody will be accomplishing the happiness and bliss.
Conclusion
in conclusion, it can be said that the role of the government is to consistent the economy and
make it stable. The government should be guaranteeing that supply of the commodities and the
services will be reflecting on the demand for avoiding the scenarios such as the property bubble
which occurred in Europe. The government got to interfere in such a way that the government
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and the citizens both benefits. After the crisis there had been a part of turmoil within the
economies of the different European countries, the countries such as Greece, Spain and
Netherlands were known to be hugely influenced due to the crisis. The international monetary
fund alongside the ECB would be organizing the mechanism which are pointed at offering the
financial help beside heading back to the way of recuperation.
Lessons learnt
From previous cases and events, we can say that government regulation is very important to
achieve positive economic growth. Through previous cases it turns out that the government was
able to control the economies that could cause the economic bubble, which may be the result of
an imbalance between demand and supply in economies. Moreover, I learned that it is necessary
to address the different crisis and try to alleviate it because it will not only negatively affect the
country, but also the society as a whole. Finally, the European crisis have been teaching us that it
is very important for the lending institutions for assessing wisely those issues which acts as a
serious measure to the countries for whom they are lending money.
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 Literature
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Academia.edu -Share research. Available at:
http://www.academia.edu/4761363/The_Financialization_of_Home
Alan S. Blinder and Mark Zandi, 2015. The Financial Crisis: Lessons for the Next One. Center
on Budget and Policy Priorities. Available at: https://www.cbpp.org/research/economy/the-
financial-crisis-lessons-for-the-next-one
Baldwin, R. and Giavazzi, F. (2015). [online] Voxeu.org. Available at:
https://voxeu.org/sites/default/files/file/reboot_upload_0.pdf
Bauer, M.J.R., 2018. Principles of microeconomics.
Beltratti, A. and Stulz, R.M., 2015. Bank sovereign bond holdings, sovereign shock spillovers,
and moral hazard during the European crisis (No. w21150). National Bureau of Economic
Research. Available at: https://www.nber.org/papers/w21150.pdf
Blinder, A.S. and Baumol, W.J., 2015. Microeconomics: Principles and policy. Nelson
Education.
http://www.btng.education/uploads/9/3/9/2/9392622/economics_principle_and_policy.pdf
Broad, M., 2013. Ireland: Before and after bailout. BBC News. Available at:
https://www.bbc.com/news/business-25339066
Joseph N. Lekakis & Maria Kousis (2013) Economic Crisis, Troika and the Environment in
Greece, South European Society and Politics, 18:3, Available at: DOI:
10.1080/13608746.2013.799731
Katsanidou, A. and Otjes, S., 2016. How the European debt crisis reshaped national political
space: The case of Greece. European Union Politics.
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Lipton, D., Spain: Building a Flexible Economy to Face the Future. IMF. Available at:
https://www.imf.org/en/News/Articles/2018/04/03/sp040318-Spain-Building-a-Flexible-
Economy-to-Face-the-Future
National Reform Programme 2017, The Netherlands. Available at:
https://ec.europa.eu/info/sites/info/files/2017-european-semester-national-reform-programme-
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Parkin, M.., 2014. Economics. Pearson University.
Raudon, S. and Shore, C., 2018. The Eurozone Crisis, Greece and European Integration
Anthropological Perspectives on Austerity in the EU. Anthropological Journal on European
Cultures.
Schiavo, G.L. and Türk, A., 2016. The Institutional Architecture of EU Financial Regulation:
The Case of the European Supervisory Authorities in the Aftermath of the European Crisis. In
Europe in Crisis. Palgrave Macmillan, London.
Stevens, R., 2010. World Socialist Web Site. Greece: Union betrayal of truck driver’s strike sets
stage for further attacks. Available at: https://www.wsws.org/en/articles/2010/08/gree-a03.html
Windy Vandevyvere & Andreas Zenthöfer, 2012. "The housing market in the Netherlands,"
European Economy - Economic Papers 2008 - 2015 457, Directorate General Economic and
Financial Affairs (DG ECFIN), European Commission. Available at:
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