In the second quarter of 2008, the European Union’s economy shrank by 0.1 percent. According to a European Commission prediction, Germany, Spain, and the United Kingdom will all be in recession by the end of the year, while France and Italy will have flat growth in the third quarter after contractions in the second.
What was the impact of the 2008 financial crisis on Europe?
The debt crisis began in 2008 with the collapse of Iceland’s banking system, then extended to Portugal, Italy, Ireland, Greece, and Spain in 2009, prompting the coining of an insulting term (PIIGS). 1 It has resulted in a loss of faith in European companies and economies.
How did European countries respond to the financial crisis of 2008?
The 2008 financial crisis, dubbed the “Great Recession” (Bermeo and Bartels 2014), prompted policy responses, most notably deep cuts in government spending, which sparked massive protests across Europe and beyond (Baumgarten 2012; Fuster Morell 2012; Fuster Morell 2012; Fuster Morell 2012; Fuster Morell 2012; Fuster Morell 2012; Fuster Morell 2012; Fuster Morell 2012; Fuster Morell 2012; Fuster Morell 2012; Fuster More
How did the financial crisis effect Europe?
Since the end of 2009, the European debt crisis, often known as the eurozone crisis or the European sovereign debt crisis, has been a multi-year debt crisis in the European Union (EU). Several eurozone member states (Greece, Portugal, Ireland, Spain, and Cyprus) have been unable to repay or refinance their government debt or bail out over-indebted banks under national supervision without the help of third parties such as other eurozone countries, the European Central Bank (ECB), or the International Monetary Fund (IMF) (IMF).
A balance-of-payments crisis, or a sudden stoppage of foreign money into nations with large deficits and reliance on foreign credit, triggered the eurozone crisis. The inability of states to devalue their currencies exacerbated the situation (reductions in the value of the national currency). Prior to the adoption of the euro, macroeconomic variations among eurozone member states contributed to debt building in some eurozone members. The European Central Bank set an interest rate that encouraged Northern eurozone investors to lend to the South while encouraging the South to borrow since interest rates were so low. As a result, the South’s deficits grew over time, owing mostly to private economic actors. Unbalanced capital flows in the eurozone were exacerbated by a lack of fiscal policy coordination among eurozone member states, while a lack of financial regulatory centralization or harmonization among eurozone states, combined with a lack of credible commitments to provide bailouts to banks, encouraged risky financial transactions by banks. The specific causes of the crisis differed from one country to the next. As a result of banking system bailouts and government reactions to slowing economies post-bubble, private debts stemming from a property bubble were transferred to national debt in various countries. Concerns about the soundness of banking systems or sovereigns are adversely reinforcing because European banks possess a considerable amount of sovereign debt.
The crisis began in late 2009, when the Greek government revealed that its budget deficits were far greater than previously estimated. Greece requested foreign assistance in early 2010, and in May 2010 received an EUIMF bailout package. In early 2010, European nations implemented a series of financial support measures, including the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). In late 2010, European nations implemented a series of financial support measures, including the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). The ECB also aided in the resolution of the crisis by cutting interest rates and offering low-cost loans totaling over one trillion euros to keep money flowing across European banks. The ECB calmed financial markets on September 6, 2012, when it announced that all eurozone nations engaging in a sovereign state bailout/precautionary programme from the EFSF/ESM will get free unlimited support from the EFSF/ESM through certain yield-lowering Outright Monetary Transactions (OMT). Ireland and Portugal were given bailouts from the European Union and the International Monetary Fund (IMF). November 2010 and May 2011 were the dates, respectively. Greece received its second bailout in March 2012. In June 2012, both Spain and Cyprus received bailout deals.
In July 2014, Ireland and Portugal were allowed to exit their bailout programs due to improving economic growth and structural deficits. In 2014, both Greece and Cyprus were able to reclaim some market access. Spain was never formally part of a bailout program. The ESM’s bailout package was intended for a bank recapitalization fund and did not contain financial assistance for the government. The crisis has had severe negative economic and labor market consequences, with unemployment rates in Greece and Spain reaching 27%, and has been blamed for slowing economic growth not only in the eurozone but also across the European Union. It influenced ruling governments in ten of the eurozone’s 19 countries, influencing power transitions in Greece, Ireland, France, Italy, Portugal, Spain, Slovenia, Slovakia, Belgium, and the Netherlands, as well as beyond the eurozone in the United Kingdom.
What countries were hit hard by the financial crisis of 2008?
The crisis had an impact on all countries in some form, but some countries were hit more than others. A picture of financial devastation emerges as currency depreciation, stock market declines, and government bond spreads rise. These three indicators, considered combined, convey the impact of the crisis since they show financial weakness. Ukraine, Argentina, and Jamaica are the countries most hit by the crisis, according to the Carnegie Endowment for International Peace’s International Economics Bulletin. Ireland, Russia, Mexico, Hungary, and the Baltic nations are among the other countries that have been severely affected. China, Japan, Brazil, India, Iran, Peru, and Australia, on the other hand, are “among the least affected.”
Why were the consequences of Europe’s recession, which began in 2008, particularly severe for countries like Greece?
When Greece joined the euro in 2001, trust in the Greek economy surged, and the country experienced a significant economic boom. Everything changed following the financial crisis of 2008. Every country in Europe went into recession, but Greece suffered the most because it was one of the poorest and most indebted. In 2013, the unemployment rate was 28 percent, which was higher than that of the United States during the Great Depression.
Greece could have improved its economy if it hadn’t joined the euro by issuing more of its own currency, the drachma. This would have made Greek exports more competitive by lowering the drachma’s value in international markets. It would also cut domestic interest rates, promoting local investment and making debt repayment easier for Greek borrowers.
Greece, on the other hand, follows the same monetary policy as the rest of Europe. And the European Central Bank, which is dominated by Germans, has imposed a monetary policy that is about right for Germany but too restrictive for Greece, plunging the country into recession.
As a result, Greece is trapped between a crippling debt burden 177 percent of GDP, nearly twice that of the United States and a profound depression that makes it difficult to raise the funds needed to make debt payments.
Greece has been negotiating for financial aid with the European Commission, the European Central Bank, and the International Monetary Fund (called “the Troika”) for the past five years. Greece has been receiving loans from the Troika since 2010, in exchange for tax increases and budget cuts.
Germany and other wealthy European nations say they are just requiring Greece to live within its means. However, the bailouts’ stringent terms have engendered animosity among Greeks and contributed to crisis-level unemployment and destitution. They elected a new left-wing prime minister, Alexis Tsipras, in January, who promised to reject the previous bailout arrangement in favor of a more favorable one.
He does, however, have very little clout. Because private banks held a large portion of Greek debt in 2010, a Greek default may cause financial panic. However, since then, the debt has been consolidated in the hands of wealthy European countries, lowering the chance of a financial crisis if Greece fails.
As a result, Greece is faced with a difficult decision: accept the Troika’s proposals for more austerity or reject them. Or it can resist the Troika, which would very certainly result in a Greek debt default and possibly a euro exit. On July 5, the Greek government will organize a referendum to allow people to pick between these two poor options.
In the meantime, Greece’s economy is collapsing. Greeks have been flocking to ATMs to take as much cash as they can, knowing that their euro savings may soon be converted into devalued drachma deposits. The Greek government was compelled to close banks and limit withdrawals to 60 a day as a result of this.
What triggered Europe’s debt crisis?
The European debt crisis is a long-running financial crisis that has made it difficult or impossible for several euro-area nations to repay or refinance their government debt without the help of third parties.
The European sovereign debt crisis arose from the eurozone’s structural problem and a complex set of factors, including globalisation of finance; easy credit conditions between 2002 and 2008, which encouraged high-risk lending and borrowing practices; the 2008 global financial crisis; international trade imbalances; real-estate bubbles that have since burst; the 20082012 global recession; fiscal policy choices related to government revenues and e-government.
One explanation for the crisis begins with the large growth in savings available for investment between 2000 and 2007, when the worldwide pool of fixed-income securities grew from over $36 trillion in 2000 to nearly $70 trillion by 2007. As savings from high-growth developing countries entered global financial markets, this “Giant Pool of Money” grew. Investors looking for higher returns than those offered by US Treasury bonds looked for alternatives around the world.
As lenders and borrowers put these resources to use, building bubble after bubble throughout the globe, the temptation posed by such easily available savings overpowered policy and regulatory control systems in nation after country. While these bubbles have burst, causing asset prices (such as home and commercial property) to fall, the liabilities due to global investors have remained unchanged, raising concerns about governments’ and banking systems’ viability.
Each European country affected by the crisis borrowed and invested money in a different way. Ireland’s banks, for example, provided money to property developers, resulting in a large property bubble. Ireland’s government and taxpayers assumed private loans when the bubble crashed. In Greece, the government boosted its promises to public employees by providing extraordinarily generous wage and pension benefits, with the former more than doubling in real terms during a ten-year period. Iceland’s banking system exploded, resulting in obligations to international investors (external loans) that were many times the country’s GDP.
Because the global financial system is interconnected, if one country defaults on its sovereign debt or goes into recession, putting some external private debt at danger, creditor countries’ banking systems will suffer losses. In October 2011, for example, Italian borrowers owed French banks $366 billion (net). Should Italy be unable to fund itself, the French banking system and economy could be put under tremendous strain, affecting France’s creditors and other stakeholders. Financial contagion is the term for this. The concept of debt protection is another component that contributes to interconnectedness. Credit default swaps (CDS) were contracts put into by financial institutions that result in payment if a debt instrument defaults (including government issued bonds). However, because numerous CDSs can be acquired on a single security, it’s unknown how much CDS exposure any country’s financial system now has.
With the use of derivatives devised by large banks, Greece, Italy, and other nations attempted to artificially decrease their budget deficits, misleading EU officials. Although certain financial institutions definitely gained in the near term, the crisis was preceded by a long period of uncertainty.
When did Europe’s Great Recession end?
In 2009, Chrysler, for example, filed for bankruptcy and was compelled to take some government ownership as part of bailout measures. Consumer confidence in the economy was obviously eroded as a result of all of this, prompting most Americans to cut down on their spending in anticipation of tougher times ahead, a pattern that further harmed corporate health. All of these variables conspired to cause and extend the United States’ profound recession. Between the start of the recession in December 2007 and the official end in June 2009, real gross domestic product (GDP) that is, GDP corrected for inflation or deflation fell by 4.3 percent, while unemployment rose from 5% to 9.5 percent, peaking at 10% in October 2009.
How did Germany do throughout the Great Recession?
In contrast to a number of other large economies, Germany’s recession was not preceded by a credit bubble. Instead, a significant recession was precipitated by a drop in global trade flows, with GDP contracting by 6.8% by the start of 2009.
Who was affected by the Great Recession?
Rising unemployment, dropping property values, and the stock market decline all had an impact on those approaching retirement, either directly or indirectly. Furthermore, many elderly persons who were not directly impacted by the recession had children or other relatives who were. For many older persons, the recession’s financial difficulties resulted in changes in wealth and spending patterns, as well as physical and mental health issues with long-term effects.
What was Brexit, and what impact did it have on the EU?
These results show the continuation of a previously expected trend. The IFO quantified the implications of Brexit on Europe in a report for the German government published in 2020. Even in the event of a Brexit agreement, we anticipate GDP losses for the EU and substantially larger losses for the UK. As uncertainty grew and businesses adapted to the new climate following the 2016 referendum, some of the negative consequences on GDP and trade began even before the separation agreement in 2020.
The UK’s share of EU exports declined from 7.1 percent in 2015 to 6.2 percent in 2019, while its share of imports fell from 4.4 percent to 3.9 percent these figures include cross-border trade. We noticed more trade diversion away from the UK during the epidemic, estimated at a further drop of more than one percentage point.
Part of the difficulty is that there is more red tape. Unlike the provisions of the Brexit agreement, which permitted Britain to avoid increased trade tariffs, most items now face at least one new “non-tariff barrier” to enter the EU market. Inspection certificates, new customs procedures, and a vast volume of additional paperwork all add to the time and complexity of crossing the border, raising trading expenses. During a pandemic, these hurdles are disastrous for EU-UK business, as it is more difficult for firms to locate alternate markets, especially for small and medium-sized businesses.
Non-tariff barriers are considerably more problematic for the UK than they are for the EU. Even if the UK inks trade deals with other nations, the notion that increased economic exchange with the United States, India, Australia, New Zealand, Canada, or Japan will compensate for lost EU commerce is false.
The significance of varied supply chains is one of the most important lessons learned from the pandemic. Another factor to consider is geography: countries generally trade with their immediate neighbors. In 2019, the EU supplied 50% of the UK’s imports, and the union received 47% of the UK’s exports. We show in a study on product dependencies that these ties are especially strong for items imported into the UK from five or fewer suppliers: 64% come from the EU. Because the majority of these are intermediate items (such as raw materials), higher trade costs as a result of Brexit could raise the cost of final production in the UK and contribute to inflationary pressures on top of a worldwide trend of rising prices and already stressed supply networks.
The negative effects and challenges of Brexit for Europe go far beyond the GDP effect: with the leave of a country with significant global influence, the EU lost around one-sixth of its economic power and a far higher share of its foreign and security policy weight. The financial deficit created by Brexit will have to be filled in part by higher budget contributions from the remaining 27 countries. Furthermore, as a result of the power change following Brexit, the EU risks becoming more protectionist and less reform-oriented in the future.
The lengthy duration of the Brexit negotiations should serve as a cautionary note to EU member states. Because of the circumstances, some crucial topics will be open for renegotiation sooner or later, the agreement reached with the UK will never be able to erase all trade uncertainty.
On the last day of January 2020, a more than half-century-long trend toward deeper political unification in Europe came to a stop. The effects will have a long-term impact on us.