The Current Economic Crisis in Europe

Pages: 5 (1536 words) Published: May 15, 2012
Kevin Jiang
Mun Huntington Beach
Topic II: Economic Crisis


The current economic crisis that exists in Europe and is of concern to the European Union can be traced to similar themes of other crises of the past. A crisis generally follows an economic boom where money and credit expand widely which leads to over-confident investors who spend more than they should. This over spending causes investors to sink in to substantial debt when they are forced to default on loans in order to remove themselves from the over-leveraged situation they have created. Several of the European Union member nations have been followed this pattern which has plunged Europe into the greatest economic crisis since the Great Depression. One factor that allowed this over-leverage to happen was the establishment of the Euro in 2002. This economic integration of Europe was an important goal for peace since the close of World War II and of the Maastricht Treaty (which created the European Union in 1992). The Euro is the common currency of 17 European nations known as the Eurozone, and with it member nations have access to large amounts of credit. Because of such easy access to credit, some nations ended up spending significantly more than was justified by their specific economy. This is exemplified by Greece, and was exacerbated when in 2007 they decided to try to hide their debt until by 2010 they had accumulated a debt of approximately €215 billion.

In response to the growing debt member nations were incurring, the European Union provided bailout plans to help liberate its members. To facilitate these plans the European Financial Stability Facility (ESFS) was created in 2010 in order to bail out countries with high debt. Some of the nations ESFS attended to included Ireland and Portugal whose indebtedness was greater than that of Greece. The last loans to be given were in December of 2011 with €3.7 billion allocated to Portugal and €2.72 billion to Ireland with different plans to pay off those loans in the future. As helpful as these bailout plans may seem, the effectiveness is yet to be determined as to whether or not the EU can successfully bail out its members.

The EU has taken other courses of action to try and ease the burden the financial crisis has put on its members. Its monetary body, the European Central Bank (ECB), has undertaken long term refinancing operations under its new president Mario Draghi. Due to the policy of the ECB, it cannot directly bail out governments by purchasing government debt, and because of this it has taken other means of providing support to the unstable continent. In late December, Draghi flooded banks in Europe with billions of dollars worth of nearly interest free capital in order to allow the banks to buy out the national debts. Although the impact of the ECB’s actions are not huge, it has brought unexpected success in allowing nations to acquire a chance to finally end the crisis or at least postpone more adversity to come.

U.N. Involvement:
The European Union has been directly involved in trying to solve the economic crisis, as it affects each country within the EU. On September 26, 2008, the “European Economic Recovery Plan” was proposed, which includes broad solutions of a coordinated European approach, including “swiftly stimulating demand; helping the most vulnerable people affected by the downturn; preparing Europe to be competitive with a view to future growth; taking advantage of this period of upheaval in order to accelerate the establishment of a cleaner economy with more concern for the environment.” Solutions in this document aim to solve issues at the financial market and macro-economic level, business level, environmental level, and global level, including using European Investment Bank (EIB) to increase its annual interventions in the EU by about €15 million through loans, guarantees and risk sharing financing, as...
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