MBA Managerial Economics: Analysis of European Economic Crisis

This report examines the economic crisis in Europe following the 2008 global depression, focusing on the interventions by the Troika (European Commission, ECB, and IMF) in countries like Greece, Ireland, and Spain. The analysis covers the causes of the crisis, including government overspending, housing bubbles, and banking failures. It evaluates specific measures implemented by the Troika, such as VAT increases in Ireland, pay cuts in Spain, and changes to housing schemes in the Netherlands, using economic models and graphs to illustrate their impacts. The report concludes by assessing the winners and losers of these interventions and considering the long-term effects on the affected economies, drawing lessons learned from the crisis management strategies.

Running head: ECONOMICS
Economics
Name of the student
Name of the university
Author note

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Table of Contents
Preface........................................................................................................................................2
Introduction................................................................................................................................2
Central problem..........................................................................................................................2
Aim of the report........................................................................................................................3
......................................................................................................................................................
Literature review........................................................................................................................4
Greece....................................................................................................................................4
Ireland....................................................................................................................................5
Spain.......................................................................................................................................5
Intervention by Troika............................................................................................................6
Housing scheme of Netherlands...............................................................................................11
Conclusion................................................................................................................................12
Lessons learnt...........................................................................................................................12
Reference list............................................................................................................................13

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Preface
This module will be important in my future career in a way that it will help in
developing the understanding of the forces of demand and supply. Throughout the course, I
have been inclined for understanding the economic structure globally. Managerial economics
had always been one of my favourite subject and it help me to understand the various
regulations that have taken place in the global markets. The managerial economies will also
be shaping the markets and the economies at large.
Introduction
The financial crisis along with the economic recession will be having a huge impact
on the countries in the European Union and also in the countries of the Eurozone. After the
crisis there had been a lot of turmoil in the economies of the various European countries. The
countries such as Greece , Spain and Netherlands were known to be hugely affected due to
the crisis. The International Monetary Fund along with the ECB would be structuring the
mechanism which are aimed at offering the financial aid along with guidance back to the path
of recovery., the combined effort Of the IMF and ECB will be help in structuring in
mechanism which aims at offering the financial aid and guidance back to the path of recovery
for the largely affected countries.The following paper will be using the literature for
analysing the economic crisis in Europe till the year of 2017 and thy combined efforts will be
helping in the stabilization of the situation back to normal.
Central problem
With the huge monetary crisis taking place in the all over Europe, its huge impact
were fell in the European economies where the European commission to9gether with the
ECB and IMF will be swiftly moving in for jointly curbing the situation and the formation of
this particular joint body is known to be Troika. This particular joint body had been made for

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saving the adversely affected countries such as Netherlands, Spain and Greece by offering
them with financial support to the governments and the various institutions which were at the
brisk. The4 Troika loans have been benefitting the Greece and Spain on the large scale. Some
of the countries were also expected for restructuring their entire economies in an effort which
would also help in restructuring their wage among the other reforms.
Aim of the report
The objective of the report is to develop an understanding the various forces of the
demand and supply that will be determining the market structure. The global depression
between the years 2007 and d2008 and will be impacted on the global economy. The research
will be addressing the interventions implemented by the different global agencies for
handling the economic crisis with the various paces of Eurozone in main countries namely
Ireland, Spain, Greece and Netherlands. The central condition 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 will be
What was the effect of the increased VAT of Ireland on the economy of the country in
terms of production?
What happened when the liberalization of the housing market took place in
Netherlands and how will it affect the economy of the country?
Was the Netherland’s rule for the donation scheme fair according to the economic
principle?
What happened when there was pay cut in Spain on the employees of the economy of
the country?

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What the impact on the European countries due to the European crisis?
Literature review
The economic crisis which have been taking place in the various Eurozone countries
after the global depression which took place in the year 2008, will be attributed for the
existence of the inadequacy of the economic structure in the European Union. The crisis that
took place in the year 2007 and 2008 was devastating.
Greece
During the 20th century the economy of Greece had been doing quite well over the
years. It had been experiencing high growth rates and low public debt. It was also by that
time the fastest growing in the Eurozone countries. However, when the economic crisis in the
year of 2007 and 2008 had been badly hit, Greece had been very badly hit because of its
presence of main industries of shipping and tourism. These two industries were very
sensitive for the changes in the business cycle.The debt kept on increasing as the government
had to spend heavily for keeping the economy functioning. The borrowing rates for Greek
also started rising with the 2009 budget deficit. By the year 2010, the country was unable to
borrow anything from the markets. The crisis in the year 2007 witnessed a huge rise in the
savings which had been availed 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
nations which known to enter the global capital market. Investors are known to access the
variety of sources of capital where there had been a huge rise in investments along with
triggering bubbles cross various sectors in the global market. The financial crisis of Europe
had been taking place due to the bursting of the bubbles from the housing to the banking
industry across Europe as the asset price were seen to decline below the primary values.

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Ireland
The debt crisis in the case of Ireland rose significantly as a result of overspending by
the government and also from the Irish banks who have known to finance during the property
bubble. For this reasons the Irish banks were known to have lost around more than hundred
billion euros. Most of the loans were given to the property developers and the homeowners
which were present in the property bubble. The burst took place in the year 2017 and the
economy collapsed at 2008. The unemployment rose from four percent in the year 2008 to
fourteen percent by the year 2010. This resulted in the rise of deficit of more than thirty
percent of the gross domestic product in the year 2010. After the year 2011, the European
leaders will be agreeing to cut the interest rate which Ireland had been paying on the
European Union bailout loan from more than six percent and then the loan doubled
(Katsanidou and Otjes 2016). For all these reasons the government agreed for reducing the
budget deficit to below three percent by the year 2015. The economic crisis the Eurozone
saw several economies in the region to plunge into complete financial crisis with the bank
and governments being the main victims of the whole crisis.
Spain
Spain had been experiencing comparatively low debt level among the advanced
economies which took place before the crisis. The public debt relative to the gross domestic
product in the year 2010 was more than sixty percent. Debt was avoided by raising revenue
from the housing bubble. It helped to accommodate the amount which increased the
government spending without the debt accumulation. When there will be bubble burst, Spain
had been known to spent huge amount of money on the bank bailouts. The bank bailouts
along with the economic downturn increased the deficit of the country along with the debt
levels. It led to a substantial downgrading of the credit rating (Bourne and Chatzopoulou
2015). For building up the financial markets the government will be introducing the various

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measures. The economic downturn along with the bank bailout swill be increasing the deficit
of the country along with the debt levels. As the monetary practices in the Eurozone lacked
sufficient regulatory structure of the monetary system among the various embers states the
banking system of Europe came under scrutiny for failure in order to maintain the positions
in the European market economy. This was accompanied by the huge capital fight to the
Eurozone in strong economic stabilities from those that had started witnessing various
financial crisis which was the main cause of the total breakdown in countries like Spain ,
Greece and Ireland.
Intervention by Troika
Since the economic conditions in the Eurozone started deteriorating, the formation of
Troika took various steps for advising the affected countries on the various steps.
1. Greece
When Ireland is known to increase the value added tax on the products and services,
Greece had known to choose various strategies and is also known as the monopoly markets.
There have been abolition of the transport license fee for the citizens. The various effects of
the moves takes place as an extension of demand. The change in the quantity of demand
takes place when the quantity demanded of the commodity will be changing as a result of
change in the price while keeping the other factors constant. This policy will be having a
positive impact on the economy of the country. It will be opening other avenues for
increasing the taxes when the various sectors will be booming. When there will be
development in 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 government which will
also help the service in the long standard deficits which the country owes Troika.

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Therefore, in order to conclude it can be said that this will be encouraging people for
investing them in the transport industry that will be improving the road networks and
infrastructure of the country( Bauer 2018). The growth of the industry will be helping in the
creation of more jobs and will help in earning the government revenue. It will be also
motivating the foreign investors who will be viewing Greece as an attractive location where
business will be quite easy. Also, the investors will be deciding for helping them to bailout
the county by buying treasury bonds for protecting the investments within Greece. The
government and the citizens will be benefitting them from abolishing the transport license
fee.
Figure 1 Monopoly market structure
(Source: Parkin 2014.)

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Figure 2 Movement in demand curve
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 are abolished, it can be seen as
the economic incentive for the public.
2
Spain
Spain will be resorted for the general pay cut of the ten percent across the employed
citizens (Beltratti and Stulz 2015). With the pay cut, the implied disposable income of Spain
will be reduced and will be directly impacting the market demand. After this, the demand

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will be shifting to the left. When the price will be increasing from Ph to P1. The quantity will
be of less amount and this will result the equilibrium to decrease as indicated in the curve.
When wages will be cut it will be hurting the domestic consumption it will be affecting the
growth (Baumol. and Blinder 2015). The government and the citizens will be losing as long
as the consumption pattern will be lowered the government will be failing to optimize the
revenue generation of revenue for running the economy. Therefore, in order to conclude it
can be said that the government will be benefitting in the short term and will continue to
grow since it will be trimming the wage bill. The citizens will be losing due to the fact that a
general pay cut will be reducing the income. The debt crisis of Europe in the Great Recession
around the 2009 was characterized by the high gover4nment structural deficits with the huge
amount of debt levels (Aalbers 2016). When there will be negative effect of the great
recession, there will be fragile banking system who had suffered large scale losses where
most states in Europe will be bailing out the affected banks. To fight the crisis some
governments have been focusing on increasing the taxes with lowering the expenditures
which will be contributing to social unrest (Cowell 2018).

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Figure 3 Fall in demand
(Source: Parkin 2014.)
When the general pay cut of 10 percent is proposed, the demand curve shifts to left. After that
the price will increase. The equilibrium will be also decrease. The government might benefit
from this pay cut and will also able to earn revenue.
Ireland
The rise in the VAT by 23 percent by the government is a major reform in Ireland.
Therefore, this will be having a positive and the negative impacts.
Positive impact
The positive impacts of the rise in VAT can be viewed as driving the efforts for
generating huge amount of revenue (Raudon and Shore 2018). The rise in VAT therefore will
be help in the overall state income. The negative impacts include that when there will be rise
in VAT it can lead to inflation which results due to rise in prices and reduction in the real

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amount of the goods 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 effect the spending pattern will be changing and therefore there will be a
tendency for increasing the saving rather than spending which will leads to low demand.
Figure 4 Impact of tax on Ireland
(Source: Parkin 2014.)
With the introduction of tax, there will be presence of deadweight loss in the society. When
tax is imposed, the price of the goods goes up and the quantity demanded have declined. For
this reason the goods in Ireland will become expensive after the introduction of VAT.
Netherlands
The liberalization of the housing market had been opted by Netherlands by limiting
the mortgage interest reduction. The deductible interest amount €10.000where the rate of
deduction will be dropping to € 5.000, - per year per household.

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Figure 5 increase in supply
(Source: Parkin 2014.)
The prices of the housing will fall as a result of increase in the supply. For limiting
the mortgage interest deduction in Netherlands the interest rate will be shrunk. When the
rates by the central bank will be cut it will mean that there will be reduction in the monthly
mortgage repayments of the people where repayments will be varying (Ongena, Popov and
Van Horen 2016). The mortgage interest payments are known to decrease from €10 Trillion
to €5 Trillion per year in the economy of the particular country.
Housing scheme of Netherlands
As a result of the huge economic crisis the price of the housing known to have
dropped by more than twenty percent. For stimulating the housing market the government
will be introducing the tax free donation scheme. By this particular case parents in the year
of 2014 will be donating the tax free amount up to € 100.000, to their children. The amount
then can be used for renovation of the houses or for lowering the mortgage amount. The
donation scheme was known to be quite 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

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fair since they have been imposed when the price of the housing market will drop. This
particular scheme of tax free amount was considered as the solution for regaining the part of
their loss on the property (Schiavo and Türk 2016). However, the result of will be unfair in
some case. As the benefit will only be achieved for the housing owners markets and not
everyone will be achieving the happiness.
Conclusion
In order to conclude it can be said that the role of the government is to stable the
economy. The government should be ensuring that sup-ply of the commodities and the
services will be reflecting on the demand for avoiding the scenarios such as the property
bubble which took place in Europe. The government should be intervening in such a way
that the government and the citizens both benefits. After the crisis there had been a lot of
turmoil in the economies of the various European countries. The countries such as Greece ,
Spain and Netherlands were known to be hugely affected due to the crisis. The International
Monetary Fund along with the ECB would be structuring the mechanism which are aimed at
offering the financial aid along with guidance back to the path of recovery.
Lessons learnt
From the various cases it can be learned that the gove4rnemtnregulat5ion will be quite
critical for achieving the positive economic growth. The cases that have been discussed above
the government have known to regulate the economies which will be triggering the economic
bubble is a consequence of the imbalance created between the demand and supply in the
economies. I have also learnt that it is essential for addressing the various crisis and also
moderate them since such crisis will be damaging the whole block. We have also learned that
the European crisis have been educating us it is very much important for the lending

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institutions for evaluating wisely those issues which acts as a severe measure to the countries
for whom they are lending money.

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Reference list
Aalbers, M.B., 2016. The financialization of home and the mortgage market crisis. In The
Financialization of Housing (pp. 40-63). Routledge.
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Nelson
Education.
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.
Bourne, A. and Chatzopoulou, S., 2015. Europeanization and social movement mobilization
during the European sovereign debt crisis: The cases of Spain and Greece. RECERCA.
Revista de Pensament y Anàlisi, (17), pp.33-60.
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Katsanidou, A. and Otjes, S., 2016. How the European debt crisis reshaped national political
space: The case of Greece. European Union Politics, 17(2), pp.262-284.
Kreuder‐Sonnen, C., 2016. Beyond integration theory: The (anti‐) constitutional dimension of
European crisis governance. JCMS: Journal of Common Market Studies, 54(6), pp.1350-
1366.
Parkin, M.., 2014. Economics. Pearson University.
Postlewaite, A., 2016. Report of the Editor: American Economic Journal: Microeconomics.
American Economic Review, 106(5), pp.736-39.
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, 27(1), pp.64-83.

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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 (pp. 89-121). Palgrave Macmillan, London.