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European Union Financial Crisis

The current crisis in the European monetary union has many observers warning that not only will the Euro currency collapse, but also the entire European integration project. How would you answer such a cautioning statement? Instead of explaining current specific incidents or predicting the probable results, the emphasis should be on describing the larger context for how we should understand the developing anxiety. Why do we analyze such problems (as the hesitation and disputes over how to answer the current dilemma), and what pieces of the expansion and configuration of the European Union must we know in order to properly evaluate statements about the collapse of monetary union and the integration of Europe at large?

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The economic crisis in Europe cannot be considered, without looking at the true genesis of the crisis. The crisis commenced in the year 2007 in the US, then was transmuted to a world recession in 2008-9, to the final stage of the crisis in European Union (EU). The European crisis is characterized by recovery in some countries of the EU and deepening recession in others. These contradictions have brought into question the effectiveness of monetary integration of the EU and the future of the euro . That the European crisis is actually an extension of the global crisis finds support in several studies(Chesnais 2011; Johsua 2011; Lapavitsas et al. 2011). In February 2010, the rumours of a Greek default gathered strength, just as the world seemed to be recovering from the economic crisis.

The real estate crisis -the EU guilty too

The real estate crisis that originated in the US, was not limited to the United States alone. According to a 2009 estimate by the IMF, the cost of the bailout in April of that year was approaching $4 trillion, of which $2.7 trillion was for the United States, $1.2 trillion for Europe, and $149 billion for Japanese financial institutions. A U.S. congressional committee later found that TARP (Troubled Assets Relief Program), a $700 billion program instituted in 2008 by George W. Bush's administration to rescue the U.S. financial system, included massive loans at interest rates near zero (0.01 percent, to be precise) to bail out thirty-five foreign banks trapped in the crisis, including several of the most important European banks, mainly German and French: BNP Paribas, Deutsche Bank, the Royal Bank of Scotland, Société Générale, and the Union of Swiss Banks(IMF,2010).The European banks enmeshed themselves deeply in the bond business and mortgage-backed derivatives. Half the bonds and derivatives linked to the real estate market were sold outside the United States (Roubini and Mihm 2010).

Saving the Banks - The attack on PIIGS

There is no clear data that substantiates the 2010 recovery, though it was much hyped by governments and international organizations. News of the Greek crisis broke out in February 2010. The reason for the Greek crisis which was followed by crisis in the other PIIGS countries ( Portugal, Italy, Ireland,Greece and Spain) is attributed to budget deficits and government debt as a proportion of GDP increased dramatically( Guillen,2012). In two of them, Greece and Italy, the public debt figure reached 115 percent(Guillen,2012). Was this a case of government policies gone amok? It wasn't . It was a result of activities initiated by the European central bank ( ECB) and governments in order to save the European banks and financial institutions. The 'attack' was first on Greece, which was the weakest of the economies. When Greece found itself unable to refinance the enormous debt, a bailout plan was approved, which also involved the IMF, apart from the EU. The IMF is an institution dominated by the United States. This attack was then extended to other troubled European countries. The EU,together with the IMF, opted for a megaplan, a €750 billion financial cushion, of which €500 billion would be provided by the EU and European governments, and €250 billion by the IMF. They also imposed severe structural adjustments on the countries. This meant cutting back public spending, reducing subsidies, raising taxes,dismantling the welfare state, increasing the flexibility of labor markets, etc. However , Structural adjustments have never been a solution to this kind of situation. They have been tried in the past in other nations and have only served to deepen recessions and prevent repayment of debt. The result of converting private debts to public ones only served to increase the debt burden and not to reduce it.

As a result, the price of Greek, Portuguese and Spanish bonds collapsed . Interest rates on Greek bonds increased rapidly. This epidemic spread and stock exchanges collapsed. The euro weakened as a result of the rising interest rates of bond and the collapse(Guillen,2012).

The intervention of IMF was a decision taken by the dominant nations in EU. The PIIGS did not have a say in the bailout plan. Europe has two types of countries , the countries of the north which dominate the EU, with Germany in alliance with ...

Solution Summary

The solution studies the financial crisis and tries to study the real reasons for the same. 2665 words + 17 references.