Effects of the 2007-2009 Financial Crises on the Euro-zone Economies - Research Paper Example

Effects of the 2007-2009 financial crises on the Euro-zone Economies The 2007 to 2009 and is one of the greatest periods where international markets faced the greatest financial crises from the 1928 depression. There were many effects caused by this financial crisis. Modern day economics has it that different countries in a particular region come together to work harmoniously with the aim of achieving market development. One of the most familiar regions is the Euro-zone. This, as portrayed by the name is the region Europe where the countries come together with the aim of succeeding personally. The financial crises had a very huge effect on this region and it is imperative to go through these effects. This has the effect of having people understand the immense repercussions of a financial crisis and consequently work towards avoiding the occurrence of another in future. The effects in the Eurozone began from the banking system to debt issues. Prior to the recession, people used to borrow money to the banks and the banks would offer this money at a very low lending rate citing the fact that the funds were readily available. Providing low lending rates was one of the blunders that the banking system carried out in the region. After the depression hit, people started maintaining their funds and stopped taking it to the banks since they had to utilize it. This was the onset of the crisis in Europe. Banks listed in the respective country’s stock markets made the general stock market get affected (Black, 2011, 67). The banks had to keep running and the only source of money that they had to utilize was the money saved by taxpayers. This led to the banks replenishing their resources to a point that they had debts owed to the taxpayers. The main economic variable shown from this is that of public borrowing. Contemporary days have seen banks borrowing money from different banks and if a condition goes to bad for a certain bank such that it is on the verge of bankruptcy, it ends up borrowing money from the public to save it. Ireland was the first nation in the Eurozone to undergo the recession. This happened between the second and third quarter of the year 2007. This was approximately a whole year prior to the recession catching on to the rest of Europe. The country registered a contraction in GDP measuring 1.5 percent. Eurozone was one of the worst hit regions by the recession that had hit the entire world. Economists have said that this is out of the ideologies presented by the member countries. Most of the member countries are of the idea that the Gross Net Profit is more important than the Gross Domestic Product (Sutherland & Canwell, 2009, 41). All the 17 countries in the Euro area had an increase in public debt except for Germany. Germany had had a well developed system that assisted it retain a lot of money in its federal reserve and the consequent of this was its safety when it came to the economic crisis. Many economists state that the reason Germany remained strong when the crisis hit is the fact that in the previous recession, it had received a lot of condemnation and blame for being behind it. It had consequently learnt serious skills in monetary value (Meckin, 2011, 56). Varying or rather increased budget deficit is another issue that came up because of the recession. For a country to survive steadily in the contemporary market, it ought to register a budget deficit that reduces annually in terms of percent. Contrary to this, the budget deficit of these countries in the Eurozone continued increasing exponentially with each year. The was because the government had to incorporate a lot of money in purchasing commodities that the country needed while still attempting to pay off international loans taken from either the International Monetary Fund or the European Commission. The consequent effect was that the revenue for the country was less than what was spent. It is also vital to note that the country worst hit by this budget deficit was Greece but after the recession reduced, the percentage increased from 10.4 GDP to 9.6 by 2010 (Gillespie, 2011, 53) Another effect that resulted from the recession is the increase in the unemployment rates. According to the World Factbook produced by the Central Intelligence Agency, Spain, Greece and Italy faced the highest amount of unemployment increase rate. The unemployment rate increased in that rate because people in the various countries stopped carrying out and opening businesses because they could not find market for their commodities owing to the decreased amount of money in circulation. Failure to open up new businesses led to the unemployed people remaining in the state and since the population and the number of school graduates continued, there was a large number of people out of jobs. For some of the companies, they laid off most of their workers thus reducing performance. Some of the companies were even kicked off the stock market. Statistics show that the levels of unemployment rate in the country reached 11.6 that was a very great increase from the original 10.2. However, Germany and Ireland were the only countries in the region that did not register an increase in the levels of unemployment. Quite the contrary, these countries showed a decrease and this is from the fact that the population had the ability to set up new businesses despite the looming financial condition in the region and thus offering job opportunities to the unemployed (Cleaver, 2010, 76). Economists stated that despite the countries going back to their former stature after the recession and having the budget deficits reduce significantly, it does not mean that the countries would eliminate the contractions caused by the recession. This was an important statement from the fact that after the recession, most of the countries are yet to recover up to date. Many of the countries have not retained their initial budget deficit. This thus ensures that they continue paying to the consumers the amounts that they had borrowed and this slows down development for these states. However, the International Monetary Fund has worked a great deal to assist these countries recover by offering them loans at extremely low cuts. There was a decrease in exports made from the 17 zone countries, and this was because member countries could only produce amounts of food and other trade commodities that could only sustain their population. The consequent of this was people engaging in various activities that saw them try to produce the commodities that they initially imported. This was very difficult for some of the raw materials were not readily available. Moreover, in the agriculture sector, some countries could not support the climate required to produce some of the foodstuff. The World Bank speculates that the decrease in regional trade finance in Europe may have contributed to around 12% of the actual trade (Boaks, 2009, 96). Another result of the recession was that the European Investment Bank decreased the rate at which it lent the countries undergoing a recession as compared to that of other countries that did not face the recession an example being Germany. The European Investment Bank is a bank deeply relied on by people in the European Union. The countries often borrow from the country with the aim of initiating businesses and some banks even borrow from it to retain the amount of cash influx. However, during the period of the recession, the bank deemed lending this depression coupled countries as a loss because the money could get lost in repaying customer dept rather than initiating projects that would accumulate profit for the countries (Gillespie, 2011, 53). There was also a decrease in bond yields in the countries involved. Prior to the crisis, many countries in Europe were doing very well when compared to other parts of the world. Many countries were building skyscrapers that was a sign of a stable economy. This thus led to many people wishing to invest in the countries. The countries, like any other, were welcome to investors for these people would assist boom the economy. The countries got many investors. After the recession hit, many businesses reduced their operations and some that were worst hit shut down. This led to the bond yield by the investors reducing significantly to a very low amount. This disappointed investors because they did not get what they had planned. The macro-economic variable portrayed here is that of low returns. Low returns states that an investor or a businessperson is not assured of increased return on the initial investment (Sloman, 2010, 59). An effect that came from the recession is the falling of the stock market. In some cases, it even completely collapsed. People to determine the share prices of various commodities have always used stock market prices. These assist investors to determine places to invest and for the shareholders of various companies to identify the position of their organizations in the economy. Economic regression led to the failure of stock market prices by around 70%. This is a very huge amount provided the fact that each country had initially registered a huge number of companies in their stock markets. This large plunge thus made it hard for companies to determine their prices in the stock markets and for those that did they registered millions of losses (Lipsey, 2010, 76). Residential investment is another area that reduced significantly even in the general stock market. There are times that in Europe, real estate was a rather booming industry. However, this changed with the dawn of the recession. The reason is that people did not have enough money in their bank accounts to purchase homes for their families. This led to the establishment of apartments that are much cheaper to rent. Failure to have enough finance led to dealers in the real estate arena facing many losses. Some of these people got to a state of even changing their careers (Sloman, 2011, 65). The net-worth of the various non-profit organizations posted in their respective stock markets in Europe decreased significantly. Non-profit organizations do not depend on the government for their funding, rather than this; they take money out of their own savings or rather the proprietors take money out of their own savings and use it to run their organizations. After the recession set in, it is definite that these companies faced many problems because the proprietors did not have enough money to run the various projects they required. Failure for these non-profit organizations to operate led to the general decrease in the Gross Domestic Profit. Non- profit organizations have a very essential role to play in the progress of a country. Europe thus had very many countries with a low GDP and generally, the entire Eurozone was in an economic debt. One other effect of the recession on Eurozone economics is the increase in taxation. When a government realizes that it is deep in debt to either the people or international lending organizations, it tends to raise the taxes on the citizens. This is what happened in the Eurozone and is still going on. The economies of many countries plunged during the recession leading the country to borrow from many international organizations. The repercussions of this were on the general populace. There was an increase in taxation on various commodities ranging from foodstuff to luxury commodities. The government hoping to recover the amount they had borrowed and consequently pay off what they owed to the lending institutions did this. However, the consequent effect of this was having the people suffer even further despite the government promising them an improvement in the living conditions. `This is because they had a lot of problems attaining their daily needs which made them lose motivation. The tourism sector, a landmark income generating sectors in the Eurozone stock markets, is one other area greatly affected by the recession. Tourism generates around 30% of the income made by the countries in this region. The major reason is that the areas have attractive sceneries. The recession is a condition that happened worldwide and not only in the Eurozone. Travelling to watch the many types of scenery in Europe is actually a luxury and one of the actions cut down by people during the recession is decrease in taking luxurious trips. The local tourists also did not travel a lot due to lack of sufficient income to take their families to these places. This led to the tourism industry decreasing significantly in terms of the income it brought into the economy or rather the GDP of the various countries. The European countries were already facing many problems in the banking sector and this came in to deteriorate their condition (Griffiths, 2009, 67). The 2008 recession is one of the greatest to hit Europe. Had the recession lasted a lot more, it would have had a repercussion similar to that of 1928. Many effects came from the recession and these ranges from social ones, others involved technology while others involved politics. However, the greatest effect or rather the most important one is the economic one because it would see the Eurozone free from the recession. The various factors mentioned are the major effects of the recession that hit Europe. Many of the nations in the region have since then made large efforts to ensure that they improve in their economics and savings for they never know when the market may deteriorate and lead to the setting in of another recession. The effects of the recession are still being felt in some regions despite the government efforts to heal for progress. Bibliography Atrill, P & McLaney, E. 2010. Economic Recession in Europe. New York: PrenticeHall. Barrow, C. 2011. Financial management after the 2008 Recession 5th Ed. Chicago: Kogan Page. Black, G. 2008 Introduction to Management Economics, 2nd Ed. New York: FT Prentice Hall. Blackwell, E. 2008 How to prepare a Recession: Lessons from the Past, 5th Ed. Chicago: Kogan Page. Begg D. 2011 et al., Economics. New York: McGraw Hill. Boakes, K. 2009 Reading and Understanding Economics New York: FT Prentice Hall. Cleaver, T. 2010. Economics: The Basics. New York: Routledge. Gillespie, A. 2010 Business Economics. London: Oxford University Press. 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