MBA Managerial Economics: Evaluating European Crisis and Troika's Role

This report examines the European debt crisis, focusing on the roles and interventions of the Troika (European Commission, ECB, and IMF) in supporting countries like Greece, Ireland, and Spain. It explores the causes of the crisis, including government overspending, housing bubbles, and structural weaknesses in the Eurozone. The report details the impact of the crisis on specific countries and the conditions imposed by the Troika for financial assistance, such as economic reforms and austerity measures. It also discusses the Troika's efforts to stabilize the economies and prevent bankruptcies, highlighting the challenges and consequences of the crisis and the interventions.

Running head: MANAGERIAL ECONOMICS
Managerial economics
Name of the student
Name of the university
Author note

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Table of Contents
Introduction................................................................................................................................3
Central Problem.........................................................................................................................3
Aim of the Report.......................................................................................................................4
Literature Review.......................................................................................................................5
The situation of the economic crisis in the European countries.............................................5
Impact of Crisis in Greece......................................................................................................6
Impact of Crisis in Ireland......................................................................................................7
Impact of Crisis in Spain........................................................................................................7
Interventions of Troika...........................................................................................................8
Increase in the Government debt..............................................................................................10
Inflexibility of the monetary policy.........................................................................................10
European Crisis and its further effect.......................................................................................11
Intervention made by Troika....................................................................................................12
Conclusion................................................................................................................................21
Reference list............................................................................................................................22

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Introduction
The economic recession along with the financial crisis seemed to have a huge impact
on the countries within the European Union or the Eurozone. Countries such as Spain,
Ireland, Netherlands and Greece were some of the most affected areas. It took combined
efforts of the European Union, IMF and ECB for structuring a mechanism which are aimed at
offering the financial aid and guidance back to the path of recovery for the largely affected
countries. The report in the below section states the reasons behind the financial crisis in the
European crisis and the result after the crisis.
Central Problem
The European debt crisis took place when the several countries of Europe experienced
the collapse of the financial institutions. The crisis took place when the financial institution of
Iceland had collapsed. The debt crisis resulted in loss of confidence of the business and
economies of Europe. The crisis also took place with the evolution of the great recession. In
order to fight the crisis the government started to raise tax and also lowered the expenditure.
The government expenditure also started to increase because of the crisis. The Eurozone
states in the time of crisis therefore have been rescued by the sovereign bailout programs
which had been jointly provided by the International Monetary Fund and European
Commission. The European States at that time were unable to pay back their huge amount of
government debt. Therefore, the European Central Bank and the International Monetary Fund
had helped them during the crisis. The ECB and IMF together formed Troika which intended
to bailout the countries that have been affected by the European crisis.

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Aim of the Report
The aim of the paper is to find out how the countries affected by the European crisis
and how the European Commission, IMF and ECB have financially supported a large number
of countries. The paper also states the situation during the global recession which is also lead
to financial crisis in Europe. The research also shows the changes in demand and supply
which have affected the countries during the crisis. After the introduction of the research
questions, the paper further discusses about the situation of the economic crisis in the
European crisis. It also states the various impacts of the crisis specially in Greece, Spain,
Ireland and Netherland. The paper also states about the housing scheme of Netherlands.
Therefore, the research questions will be: Why did Spain, Ireland, Greece and Netherlands
need financial support?
The sub questions which will be following the research questions are
How was the starting situation of the crisis?
What was the impact on the Netherlands housing market deductible interest amount declines?
How Ireland reacted when there was a massive increase in VAT?
What happened to Greece when the transport license had been abolished which was imposed
on the citizens of the economy of the country?
What was the general pay cut for Spain?
Literature Review
The situation of the economic crisis in the European countries
The recession of Europe is the part of Great Recession which stated from United
States. The crisis had started spreading I Europe rapidly and affected a lot of countries which
were already in recessions. The recession took place only in Europe and most of countries

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had suffered from economic setbacks. The recession in Eurozone have affected the European
countries. Most of the countries in this particular region wet into complete financial crisis and
the governments who are the main victims of the whole crisis. The rise in the global savings
had mostly resulted by the high growth of the developing nations which will be entering in
the global capital markets. The financial crisis mostly resulted from the rise in the economic
bubbles across various sectors of the global markets.
The global financial crisis between the year 2007 and 2012, saw several economies in
the region to plunge into complete financial c rises where governments and banks were the,
main victims of the whole crisis. There also had been a significant rise in the savings which
availed to the potential investors for investment. The rise in the global savings had been
partially caused by the high growth in the developing nations which will enter in the global
capital market which will be offering an alternative for the investors who were searching for
high yields that those availed by the US Treasury bonds. The European financial crisis as
therefore resulted of the bursting of the bubbles from the housing market of the banking
industry across Europe as the asset prices will be declining the way.

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Figure 1Real GDP and price level.
(Source: Parkin 2016)
Impact of Crisis in Greece
The crisis in Greece had started taking place in the late 2009 which had been also
triggered by the Great Recession. The crisis in Greece was accompanied by the great
recession, structural weakness of the economy and inflexibility of the monetary policy. The
crisis also took place since t66he previous data of the deficits had been not reported by the
government itself. In the year 2009, the government debt had been further raised from
€269.3 bn to €299.7 bn. These factors had led to crisis in Greece. They crisis had also led to
rise in the cost of the risk insurance on the credit default swaps. The crisis in 2008 and 2009
had been the world’s worst financial crisis in almost more than eighty years which lead to the
global recessions. Most of the European countries had huge amount of government debt,
however only Greece had been worsely affected with the spiralling spending deficit. Greece
was known to borrow much more money than it could make in revenue with the help of

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taxes. The country was then frozen out of the bond markets. After the crisis, it had been
found out that most o9f the banks along with the foreign investors have sold their Greek
Bonds along with the holdings. After the Wall Street had imploded in the year 2008, Greece
was known to become the centre of Europe’s debt crisis. By the year 2010, it was moving
towards bankruptcy which lead to the financial crisis.
Impact of Crisis in Ireland
The crisis of the Irish sovereign debt arose from government overspending. The crisis
of the debt arose due to the state guaranteeing the six main Irish based banks who had
financed the property bubbles. The banks of Ireland had known to lost 100 billion euros
where most of them were related to the defaulted loans to property developers along with
homeowners. The Irish economy known to have collapsed in the year 2008. In the year 2010
the rate of unemployment rose to 14 percent and on the other hand the surplus went to deficit
of 32% of the gross domestic product in the year 2010.
Impact of Crisis in Spain
Spain was having a low debt when compared to all other advanced countries. The de bt was
kept low by largely huge amount of the tax revenue which had been taking place from the
housing bubble. When there had been bubble bursts Spain had spent huge amount money for
bank bailouts. Due to huge amount of the bank bailouts, there had been rise in the economic
downturn which also increased the deficit of the country. After that Spain became the prime
concern for the countries in Europe where it had to face huge difficulty in the bon markets.
Spain was suffering with 27% unemployment and the economy was shrinking 1.4% in
2013.The effect of the depression of the economy had been felt variably across European
countries as a result of varying factors for each of the country. Many f the countries had been

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suffering huge consequences as a result of the weak regulatory changes within the economies
or consequence of failure for taking any kind of precautionary financial measures which will
be buffering the economies from the impact of the crisis. The countries will be buffering the
economies from the impact of the crisis.
The Troika demanded that these countries should be executing a number of reforms
for stabilizing the economies on which they will be financially assisting for implementing the
reforms. The financial crisis in the eurozone was a result of the growing trade imbalances as
most of the countries had witnessed decreased deficit in the balance of payments as they will
strive for entertaining, he growing interest for investing the Giant Pool of Money which will
be available in the international market of money. In case of Ireland, the banks used to lend
money for property developers which will result in huge property bubble. The housing
market of Ireland also known to grow at a huge rate where the price rose up to three hundred
percent by 2006. Along with the bubble, the price of the housing will be seeing a steep fall
where over 30 percent fall in the house prices takes place by 2008. The government of
Ireland and the taxpayers will be taking a swift measure of bailing out the private investors
instead of recommending for a bail in those cases where the investors shoulder the risk and
accompany losses. On the other hand, for Greece the public wags have known to get doubled
for about ten years. Thereby had been also huge growth in the banking system which will be
creating debts for global investors on several occasions.
Interventions of Troika
With the onset of the European debt crisis which had known to originate in Greece,
spread to other countries in the Eurozone. This took place in unsustainable fiscal positions..
the crisis mainly affected the countries of Ireland, Italy, Cyprus and spain. Troika had been
formed of the European Commission (EC), the European Central Bank (ECB) and
the International Monetary Fund (IMF).The European Troika is known to represent the

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European Union in the foreign relations by concerning the security and common foreign
policy. Since the year 2009, there had been the European debt crisis that have been taking
place in the European Union wher4e several countries like Greece, Ireland and Spain were
unable to pay the government debt. There had been various reasons for the debt.
The European debt crisis which ca also be termed as the financial crisis which made it
quite difficult for some of the countries in the euro area for repaying or re financing t5he
government debt. The crisis mainly resulted from the structural problem of the Eurozone
along with the combination of some complex factors. The factors might include the
globalisation of the finance, easy availability of the credits which also lead to high risk
lending and borrowing practices. The Eurozone crisis also lead to international trade
imbalances and also real estate bubbles. The crisis was accompanied by the collapsing of the
financial institutions along with the huge government debts. After the collapse of the Icelid
bank8ing system. The debt also led to the loss of confidence in European business as well as
in economies. The European debt crisis started in the year of 2009 when the members of the
Eurozone such as Greece, Spain, Ireland, Portugal and Cyprus were unable for repaying or
refinancing the government debt in order to bail out their banks without the help of the third
party financial institutions. The reason for the crisis was mostly due to the financial crisis
and the great recession. As the amount of level of deficit was so high that the confidence of
the of the investors were eroded and the bond spreads rose to high level. Some of the4
affected European countyrie4s started to raise their taxes and slashed expenditures in order to
combat the crisis. These lead to social upset within the borders along with a crisis in
confidence in leadership in several European countries. Several countries including Greece,
Portugal and Ireland had to downgrade their sovereign debt in order to junk status which
worsened the fear of the investors. The European crisis lead to the drop in the annual growth
of the global trade. The cause of the financial crisis is usually7 attributed to the markets and

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to the regulations which will be targeting the protection of the consumers and financial
transparency. The bond markets were also known to perform poorly affecting the nations
since the rising yields means that the prices are falling. One of the reason of the European
crisis was the
Increase in the Government debt
The members of the European countries had signed a treaty in the year 1992
promising to limit their deficit spending along with the debt levels. Although some of the
countries in Europe failed to abide the guidelines by side stepping their practices and also
ignoring the internationally agreed standards. This kind of complex structure had been
developed by the investment banks of the United States. In countries such as Ireland and
Spain the low rate of interest had also led to the housing bubble which known to burst at the
height of the financial crisis. The debt crisis took place only because of the h7uge social
welfare spending. The global slowdown along with the huge financial crisis had been one of
the reason behind the European debt crisis.
Inflexibility of the monetary policy
The members of the Eurozone have known to establish a single monetary policy
which will prevent any single member from acting independently in the market. This type of
monetary policy will also not allow for creating Euros for paying the creditors and estimate
their risk of default. As they also share similar currencies with the trading partners, they will
not devaluing their currency as their trading partners. These countries will then not be able to
devaluate their currency in order to make the exports cheaper which can also lead to improve
their balance of trade, rise in the gross domestic product and higher tax revenues in nominal
terms.

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In the year 2010there had been a rise in anxiety about the rise in huge national debt
where lenders known to demand higher amount of the interest rates from several countries
with high level of debt , deficits as well as the current account deficits. For this reason it had
made quite difficult for most of the countries of the Eurozone for financing the existing
government debt in those cases when the growth rate of the economy had been quite low and
high percentage of the debt was in the hands of the foreign creditors both in the case of
Greece and Portugal. In order to fight the crisis the government at that point have started to
raise the taxes and lower the expenditures which had led to the social unrest. In countries
where the budget deficit and the sovereign deficit have rose sharply there had been a presence
of crisis of confidence which had taken place as a result of widening of the bond yield
spreads.
European Crisis and its further effect
The crisis in Greece had started taking place in the late 2009 which had been also
triggered by the Great Recession. The crisis in Greece was accompanied by the great
recession, structural weakness of the economy and inflexibility of the monetary policy. The
crisis also took place since the previous data of the deficits had been not reported by the
government itself. In the year 2009, the government debt had been further raised from
€269.3 bn to €299.7 bn. These factors had led to crisis in Greece. The crisis had also lead to
rise in the cost of the risk insurance on the credit default swaps. The crisis in 2008 and 2009
had been the world’s worst financial crisis in almost more than eighty years which lead to the
global recessions. Most of the European countries had huge amount of government debt,
however only Greece had been worsely affected with the spiralling spending deficit. Greece
was known to borrow much more money than it could make in revenue with the help of
taxes. The country was then frozen out of the bond markets. After the crisis, it had been
found out that most of the banks along with the foreign investors have sold their Greek Bonds

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along with the holdings. After the Wall Street had imploded in the year 2008, Greece was
known to become the centre of Europe’s debt crisis. By the year 2010, it was moving towards
bankruptcy which lead to the financial crisis. The debt crisis resulted in the wake of the Great
Recession around the year 2009. In the 20th century the economy of Greece had known to fare
well with high growth rate along with low public debt. Before the year 2007, it was known to
be the one of the fastest growing in the Eurozone. When the world economy had been hit by
the financial crisis in the year because 2007 and 2008, Greece had been hardly hit by the
financial crisis because of the main industries such as shipping and tourism which are known
to be sensitive to the changes in the business cycle. The government therefore used to spent
heavily in order to keep the economy functioning. For this reason the debt of the country had
increased accordingly. In the year of 2009, the borrowing of Greek started to rise slowly. By
the year 2010, the government of Greece requested a huge amount of loan of around €45
billion from the European Union and the International Monetary Fund in order to cover the
financial needs. The stock markets in the worldwide and the euro currency will be declining
in response to downgrade.
Figure 2 Producer surplus and consumer surplus