The global financial crisis broke out in 2007 and had been unabated till 2012. Some analysts believe that the consequences of the recent financial crisis have been already mitigated. However, there is still much speculation about it. Of course, some countries were exposed to deleterious effects of the financial crisis less than others. However, each state was paying its price. This paper puts an emphasis on the United States and the European Union (EU) because these two regions were gripped by the financial recession more than others. Other areas of the world had not been spared from the financial crisis too. They suffered less than the US and the EU. The unemployment rate, one of the main indicators of economic problems, reached a climax in 2009, rising to 10%, and 9.6% in the US and the EU respectively. Due to the fact that the US explored every possible avenue to eradicate a high unemployment attending the crisis, the figures began to drop in the end of 2010. In the EU, on the other hand, the situation only worsened and unemployment grew to 11.7% in 2012. This paper delves into the causes of the recent financial crisis on a global and regional level. It also explores the measures that the countries took to put an end to this crisis. The essay segues into a discussion of what the future holds for the world economy.
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In many ways, it was the most serious recession since the Great Depression. The global economic financial crisis had been caused by the imbalances. They had accumulated in the global economy in recent years, weaknesses of the institutional sector, especially in its regulation and supervision functions as well as increased competition and interdependence of world countries due to the acceleration of globalization (Taylor & Clarida, 2011). The crisis proved to be very difficult and unpleasant for the majority of world economies. It had the following characteristics: sharp reductions in production volumes, a foreign trade and international reserves as well as increased unemployment, especially in the so-called monotowns created around large enterprises. The main measures designed to help the world economies to extricate themselves from the consequences of this recession and address the crisis altogether included interventions to support commercial banks. Besides, such means as a provision of sovereign guarantees to commercial banks, nationalization of the bankrupted commercial banks, and a bevy of other instruments such as provision of preferential duties and grace periods were involved to assist the economies (Blanchard, Romer, Spence & Stiglitz, 2012).
The majority of analysts agree that the world financial crisis of 2007 began in the United States. Only then it spilled over into the rest of the world. Indeed, the US happened to be the first country to have experienced severe perturbations in its economy. Lewis (2010) reckons that the financial crisis of 2007 broke out in part because companies responded to the demand for the mortgage bonds by issuing new credits, uniting them in pools, and selling them to those willing to buy, thereby deteriorating the situation. Due to the fact that businesses curtailed their operations, they also had no choice but to abridge the labor. Multitudes of Americans were losing their jobs in droves because of the fluctuations in the country’s economy. It was something of a fallow period professionally even for the most qualified specialists. The first four years of the financial crisis deprived the American economy of roughly 8.36 million jobs. The most simple, yet reasonable, explanation for this would be the closure of plants, firms, banks, and financial institutions. The fact that the most powerful employers, such as a car industry, were in the doldrums only brought the government’s problems to its flashpoint. The financial recession overwhelmed the positive tenor in all spheres of economic and social activities in the US. It wrought havoc on the country’s commerce, financial sector, and even show business. As a result, myriads of the hitherto-powerful American firms collapsed, further exacerbating the situation. The fact that it administered a coup de grace to the American-based global financial services firm Lehman Brothers demonstrates this point clearly. According to Kroft (2013), “Lehman’s bankruptcy occurred in the midst of the financial crisis triggered by dramatic increases in mortgage defaults, and associated losses in mortgage and real estate portfolios”. Those companies that did not succumb to the raging crisis incurred significant financial losses as well.
Despite the fact that the financial sector of the world economy has been long domiciled in the US, other parts of the world were suffering as much. The global financial crisis rippled throughout the planet and its reverberations still resonated in Asia, Europe, and Latin America. It would not be an exaggeration to say that the concurrent economic and financial crises had a great impact on the member states of the European Union. The entire European economy had been gradually descending into chaos until 2010 as a direct result of the crisis. Nevertheless, it was a banking sector that suffered the most. Actually, the European banking system has not recovered from the financial crisis yet. The central EU authorities try to resuscitate it by means of pouring exorbitant sums of state subsidies into it. First and foremost, the crisis hit car and chemical industries, production of metals, and a construction sector. Over the course of the first years of the crisis, the enterprises stood idle and unemployment kept growing. As the unemployment grew from 7% in 2007 to 10.2% in 2010, and to 11.7% in 2012 (Authers, 2012), the EU countries came down to the bargaining table to find an imaginative solution of the problem.
The European sovereign debt crisis erupted in the early 2009 in the peripheral states of the European Union and then poured into adjacent countries. It is believed that this predicament had been precipitated by the bond market meltdown that engulfed Greece. As a corollary of the crisis, many Eurozone states had no choice but to resort to the intermediaries in order to refinance their government debt. In the ebb and flow of economic developments on the European continent in autumn of 2009, investors became cautious about funneling money into European economies (Navarro, 2012). To the discomfiture of the European Union, the total government debt of its member-states started ratcheting up, while their credit rating dwindled to historic lows. It should be noted that different problems underlay the debt crisis in different states. In some countries, problems ensued from the governmental efforts to bail out the ailing banking sector. It teetered precariously on the brink of bankruptcy because of the growing market bubbles (Macartney, 2013). In other states, governments attempted to reinvigorate their economic sector following the burst of these bubbles, which also triggered off the debt crisis. For instance, economic grievances befell the Hellenic Republic due to the fact that the country lavished exorbitant salaries on public servants (Cline, 2012). As a result, these imprudent policies gutted the country’s budget and Greece had to apply for the financial assistance. Judging by the highest standards, the intricacy of the Eurozone’s structure was also conducive to the outbreak of the crisis. The fact that Eurozone member-states had the common currency, but, at the same time, lacked a common tax and pension legislature, has had a crippling effect on the ability of the EU leadership to grapple with the debt crisis (George, 2013).
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In the early 2010, the anxiety of investors degenerated into outright desperation. In May 2010, finance ministers of the foremost European economies responded to the deterioration of investment climate by virtue of establishing the European Financial Stability Facility. Hereinafter it referred to as the EFSF (Fouskas & Dimoulas, 2013). This special-purpose vehicle with a budget of €750 billion became responsible for carrying out anti-crisis measures aiming at ensuring the financial stability in the EU. From October 2011 through February 2012, leaders of the Eurozone had been negotiating about the possible measures to avert a threat of the wholesale economic collapse. After due deliberations, they agreed to write off roughly 50% of Greece’s public debt, increase EFSF’s budget to €1 trillion, and augment capitalization rate of European banks to 9% (Peterson & Nadler, 2014). Whereas government bond volumes had grown significantly in a few EU member-states, the increase of government debt became a scourge for the whole European Union. Notwithstanding these financial perturbations, there has not been a sharp fall in the value of the European currency (Schiek, 2012). Three countries that suffered from the sovereign-debt crisis more than others, Greece, Ireland and Portugal, account for only 6% of the Eurozone’s total GDP (Rogers, 2012). With a view of restoring confidence of investors, EU member-states concluded the so-called European Fiscal Compact. It bound all signatories to this treaty to amend their constitutions in accordance with German standards.
In order to better understand the genesis and metamorphosis of the financial crisis in Europe, it would be logical to take a close look at the case of Greece. The majority of economists are unanimous in their belief that the recent European debt crisis has been caused in part by the inability of many EU member-states, including Ireland, Greece, Spain, and Italy. It has been to maintain equilibrium in their balance of payments. In the run-up to the crisis, the Greek economy was one of the most vibrant and buoyant ones on the continent. In the times of economic exuberance, the Greek government did not care much about its structural budgetary deficit. The baneful impacts of the crisis reverberated through the Greek economy. It is because sea transportations and tourism, the main pillars of the country’s wealth, were highly susceptible to the changes in a business cycle. As the severe economic perturbations kept tormenting Greece, the government reassessed its stance on the adverse balance of payments, while its debt obligations began to rise at a rapid rate.
The lack of fiscal discipline, a precarious balance-of-payments situation, and the ensuing political instability brought the Greek economy to a grinding halt. Of all the reasons behind a widening gap in the balance of payments in the country, changes in the relative value of the labour stand out as the most significant ones. Indeed, an implicit increase in the labour cost in the South European states has impaired their competitive capacity in the world market, which in its turn spawned the soaring balance-of-payments deficit. According to Charles Gave, “Unit labour costs – a standard measure of competitiveness – between Italy and Germany have diverged 32% since 2001” (Emsden, 2013). If the Greek government tried to keep its unit labour costs round with those of Germany, it should have kept its wages essentially flat in nominal terms over the last decade. Even though many experts believe that it is difficult to maintain the equilibrium in the balance of payments by means of curbing labour costs, it has certainly helped Germany to liquidate the threat of unemployment. The Greek government has recently managed to balance the foreign trade, thereby bringing in some checks and balances. Due to the fact that import fell by 21% and export rose by 17% in 2011, the overall trade deficit dropped by 42% (Tuori & Tuori, 2013).
The admission of Greece to the Euro club is yet another reason that has led to the deterioration of the balance of payments in this country. The architects of the Eurozone expected that the EU member-states would reach the same level of productivity. However, these expectations proved divorced from both the economic and political reality. As a result, the already yawning gap in the levels of labour productivity in Greece and the leading European economies only widened. Furthermore, even a hypothetical balance-of-payments surplus would not entail the strengthening of the national currency in this country in respect of the currencies of other Eurozone states. It is because of the circulation of the euro in all these states. As a result, prices of the exported goods have been inflated artificially. It is also inimical to the maintenance of a sound balance of payments.
Judging by the highest standards, debt obligations of the Greek government began to grow rapidly because of the unfavorable economic situation in Europe, in general, and in Greece, in particular. There were fears in some quarters that Greece would default on its debt obligations as early as in 2009. Another factor that can explain the upsurge of debt obligations in the country is the fact that its budget had been running a deficit for many consecutive years prior to the outbreak of Europe’s sovereign debt crisis. In this context, it should be noted that this deficit was poorly structured. Consequently, Greece had to assume new debt obligations. Thus, it became a symbol of government indebtedness (Micklethwait, 2010). The inability of authorities to service their public debt wrought havoc on the country’s credit rating. It lost access to the cheap financial resources in the market. It further complicated the situation around the Greek budget deficit, which kept growing at an astounding pace. All in all, the vicious circle of indebtedness still continues to cripple its economy.
It is necessary to assess the role of the financial regulation institutions, which been flexing their muscles to get involved in the management of miscellaneous economic and financial issues since the early 1980s. After all, it was the crisis in a financial sphere that acquired the most viral form in the late 2010s. Stock and foreign exchange markets as well as banking and insurance sectors bore the brunt of the crisis. As a result, some of the largest financial institutions in the US have experienced a debacle, including an investment bank Lehman Brothers. Mortgage companies Fannie Mae and Freddie Mac as well as the largest US insurance company AIG found themselves on a verge of bankruptcy. A bunch of influential European banks also faced similar problems. Monetary authorities in almost all developed countries, and certain developing countries were able to take a number of fast and essential measures to mitigate the crisis. These were a massive support for the banking sector based on its recapitalization, refinancing, and liquidity provision as well as encouragemant of consumer demand and support to the real sectors of economy (Forster, 2010). The wherewithal spent to combat the global financial crisis is virtually hard to calculate.
On the initial phases of economic convalescence, international institutions of financial regulation settled on a strategy of predicting a rapid recovery of the global economy. Thus, according to the IMF forecast, the global growth in 2010 was equal to 3.1%. Even a more impressive economic growth was projected for several developing countries. In the People’s Republic of China it was estimated to reach 9%, while India and Brazil should have been able to brag of 6.4% and 3.5% respectively (Zandi, 2009). It should be noted that the Bank for International Settlements also projected the inflation slowdown and reduction in the balance-of-payments deficit of both developed and developing countries (LeBor, 2013). At the same time, measures to stimulate the economy, as noted in the report of the IMF, have already led to an increase in the budget deficit and public debt in virtually all developed and many developing countries (Bruno, 2009). One way or another, many world economies have already managed to disencumber themselves of the overwhelning diffuculties spawned by the recent financial crisis. The main priority today is to prevent a similarly unpleasant scenario in the future.
With a view to foreclosing the possibility of the new financial crisis breaking out in the future, it is essential that the causes of the financial crisis should be liquidated. AS a result, a model of regulating the world economy altered. Summarizing the first changes in the system of regulating the global economy, it would be wise to pinpoint several steps of transformation. First of all, governments must go to every expedient in order to predict possible crises. Second, it is important that the role of the IMF and other institutions of financial regulation in the sphere of projecting and preventing crises should be enhanced. Simultaneously, the reformation of the status, purposes, and the regulating system of the IMF should constitute one of the main prongs of the anti-crisis policy. Leaders of the G-20 major economies have recently achieved a consensus that this institution should play a key role in ensuring the global financial stability and sustainable economic growth. Reallocation of quotas for countries with the emerging market economies should also appear on the agenda.
Analysts agree that national authorities should comply with the new international standards and safeguards that are being adopted by the international financial institutions in the sphere of regulation, supervision, and trade. Should the preference be shown for international standards, it will rule out any possibility of the fragmentation of markets and protectionism in the international trade. Moreover, international institutions of financial regulation should promote recapitalization of national banks. The measures of this kind will strengthen stability of the banking sector and expand its abilities to finance economy, cushioning it against unpredictable risks. By and large, it would not be fair to accuse the IMF and other international institutions of financial regulation of a failure to anticipate the global economic crisis. In fact, if it was not for these two organizations, ramifications of the crisis would have been much worse.
Although the financial crisis harried the whole planet, the first phase of this predicament has winnowed out some states as ultimate losers. It is interesting that some EU member-states have suffered from the crisis most than other less-developed world economies. From the outset, Greece, Italy, Ireland, Portugal, and Spain have belonged to this category. According to Micklethwait (2010), “Spain’s debt was downgraded, and Italy came worryingly close to a failed debt auction”. Just like in other Eurozone countries mired in horrendous foreign debt, social ramifications from the crisis in Italy and Spain were quite complicated. For instance, these two countries have seen a rejuvenation of interest in child labour. Nevertheless, they both have better chances to rein in deficits and stimulate growth than Greece. As Micklethwait (2010) has put it, “Spain and Italy could be made insolvent by a long period of high interest rates, but none has the near-inevitability of Greece”. Indeed, it is unlikely that any of these economies will descend into the economic perdition, repeating Greece’s scenario, in the nearest future.