Economic Impacts of the Eurozone Crisis: A Comparative Analysis

This report provides a comprehensive analysis of the Eurozone economic crisis, focusing on the impacts on Ireland, Greece, Spain, and the Netherlands. It examines the central problem of the crisis, the role of the Troika (European Commission, European Central Bank, and International Monetary Fund) in providing financial aid and guidance, and the specific interventions implemented in each country. The report addresses sub-questions related to the economic effects of increased VAT in Ireland, the Greek government's cancellation of transport licenses, pay cuts in Spain, and the liberalization of the housing market in the Netherlands. It also explores the Dutch donation scheme. The analysis includes the effects of Troika interventions, such as VAT increases in Ireland and the abolition of transport licenses in Greece. The report concludes with lessons learned and a review of the literature concerning the financial crisis and the combined efforts to stabilize the situation.

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
Introduction
The financial crisis that took place in 2008 in the United States of America was one of the effects
of the global economic crisis, which influenced many countries, including Greece, which is still
expected 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. There have been many economic disruptions to various
European countries after the crisis happened. It is known that there are many countries that have
been affected by this crisis significantly such as Greece, Spain and Netherlands and the
International Monetary fund in conjunction with the European Central Bank (ECB) will organize
a mechanism aimed at providing financial aid as well as guidance to recover from this crisis. The
rising prices of living are a real crisis faced by countries like Greece, Ireland and Spain.
Therefore, they had to enroll in a program that would provide them financial support. Therefore,
the largely influenced countries will receive mutual assistance from the International Monetary
Fund and the European Central Bank 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?
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 2007 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.

(Joe Brennan, 2018) 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. 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 &
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. 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. There will be presence of deadweight losses in the community due to taxation, increase
in supply and rising commodity prices (P2) with the lower quantity required (Q2) as explained in
graph. For this reason, goods in Ireland will become expensive after VAT is implemented.
Overall, the troika has contributed in improving the Irish economy than it used to be, where more
jobs were created and gross domestic product increase.

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 Greek government had to spend heavily to keep the economy
functioning because of the continuing high debt, the borrowing rates for Greek also begun rising
with the 2009 budget shortage. By the year 2010, Greece was unable to borrow anything from
the markets because of 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. It is common knowledge that
investors are prefer 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 and the supply curve will be horizontal on the point (0,0 on the X-axis). 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. When the
transport license had been abolished, it can result to an extension in the demand curve. The
policy however, will also be having a positive impact on the economy. It will be good for the
government since it will be transforming the industry from the legal monopoly market to the
perfect competition. When the transport license is abolished, it can be seen as the economic
incentive for the public.
rise in price
decrease in price
D
Figure 2
(Source: Parkin eleventh edition.)
Therefore, 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. (Ongena, Popov and Van Horen, 2016) Since it is
monopoly market, the supply will equal the MSC (Parkin). In general, Greece is still suffering
from economic problems so far, but less than it was before. After the reforms Greece economy
improved with the expectation of further improvement in the following years but there are still
some problems like the low wages.

Figure 3 Monopoly market
(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.(Bourne and Chatzopoulou 2015)
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. Once the price is 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. In other words, when Spain proposes to cut the general pay by 10 percent, the
demand curve will shift to the left and the price will also increase, and the equilibrium will be
lower. When wages will be cut it will be harming the domestic consumption it will be
influencing the growth. 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 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. 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 4 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 policy is one of the main factors
contributing 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)
Figure 5 (Source: Parkin, eleventh edition.)
The prices of the housing will drop as a result of increase in the supply and the quantity will be
higher. 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). Mortgage interest installments in the
Netherlands are declining annually within the economy of the country. (Manuel B.Aalbers,
2008)
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. In
general, the donation scheme may be fair or unfair depending on the situation as explained in
advance.
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
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. Some countries are still suffering
from the effects of the crisis and have not fully recovered, but in general their economic situation
has become better than in the past.
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. The euro zone now has a
more flexible and strong economy.

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