European Financial Crisis - Essay Example

European Financial Crisis What are the causes of the European financial crisis in a nutshell? (190-200 words) The European financial crisis, also known as the sovereign debt crisis, had various causes, depending on the country in perspective. In many countries, it was a result of private debts that were caused by a property bubble. The debts were transferred to the government with after the banking system was engaged in bailing out the debtors. In other countries such as Greece, pension commitments and an unsustainable public sector wage led to a rise in the state’s debt.

According to Van Den Noord (37), countries like Italy engaged in extravagant spending while Germany kept way over the set range for deficits and debts laid down by the stability and growth pact. It did this for years and no country raised a hand to punish Germany. The financial crisis started back in 2007 characterized by a long phase of quick credit growth, low risk premiums, profuse liquidity and the growth of real estate bubbles. Overstretched leveraging made financial institutions susceptible to corrections in asset markets, according to Kolb (113). 2. Who is responsible for the crisis, and why? a. In the financial sector (100-110 words) The parties that carry the most responsibility for the European economic crisis in the financial sector were banks.

Banks in Europe had invested heavily in extremely complex, opaque and highly priced financial products (Van Den Noord 12). Many banks became uncertain of the credit worthiness of their counterparts who had engaged in such investments. This virtually resulted in the closure of the interbank market with risk premiums soaring on interbank loans. As a consequence, the banks faced grave challenges in rolling over their short term debt. In Ireland, for example, the banking system achieved exceptional growth thereby creating external debts far beyond the country’s gross domestic product. b. In the government sector (100-110 words) In the government sector, the structure of the Eurozone was widely to blame for the economic crisis.

The zone uses one currency, and in the absence of fiscal union, the ability of leaders to respond adequately remained quite limited (Van Den Noord 23). Different countries failed to abide by the fiscal paths or requirements of the union. Governments are also to be blamed for the crisis considering that they did not deal with their over expenditure before the situation got out of control. In Greece, for instance, the government made great commitments to its public workers and gave them huge pension benefits and wages.

Governments also borrowed so much from banks.3. What are your recommendations to fix it? (90-100 words) The Eurozone financial problem is a detachment of a global problem. The global problem is all about lack of equilibrium between the private sector managing huge and concurrent excesses and the public segment managing huge deficits. It is important for the countries most affected to take measures to reduce government spending such as by lowering wages as recommended by Van Den Noord (57). It is also imperative to increase the competitive status of Greece and Spain thereby strengthening their economies (Aslund 88).

Other countries in the Eurozone that are less affected by the crisis could join forces and bail their ailing counterparts and, therefore, liberating them from their economic problems. Works CitedAslund, Anders. The Last shall be the first: the East European Financial Crisis. Washington, D.C. Peterson Institute. 2010. Print.Kolb, Robert W. Lessons from the Financial Crisis: Causes, Consequences, and Our economic Future. New Jersey, USA. John Wiley & Sons. 2011. Print.Van Den Noord, Paul. Economic Crisis in Europe: Causes, Consequences and Responses.

London, United Kingdom. Taylor & Francis. 2011. Print.