The European crisis is the financial crisis that affected, and is still affecting, countries within the Eurozone. The predicament is majorly attributed to the countries’ inability to repay their debts free of assistance that comes from third parties. Various intervention measures including European financial stability facility, European fiscal compact, and integration of bank managements among others have been employed to control the issue. However, the crisis is not yet solved. On the other hand, the U.S crisis refers to the increased decline in profits and performance of the U.S’ economy. This trend can be stemmed back to 1950 when profits began declining in the U.S. Accordingly, the disaster continued up to the end of the recession in the U.S in 2009 (Keilis et al. 2008, p.1). The crisis led to high inflation rates due to the raised prices aimed at maintaining profit rates instead of sacking employees and having the outputs increased (Long 2012, p.1294).
The government continued raising interest rates in the 1980s. Housing has also affected the economy since 2006 when prices of housing began decreasing. This resulted in homeowners’ inability to finance mortgages when the rates of repayment were increased. For example, these rates tripled between 2006 and 2008. According to (Dirk 2012, p.9), this crisis was evident since 2007. The peak of this deliquesce was in 2012 when it reached 6.8. Armature banks also masked control from the regulators and investors using securitisations and off-balance sheets (Michael 2009, p.253). According to Wall Street (October 11, 2008 p.1), the United States’ economic crisis has affected other countries with an average of 40% loss. As the paper unfolds, though the two crises seem to be equally weighted, the European crisis is greater than the U.S crisis because the European crisis emanates from both the government and the private sector’s inability to repay their debts. The U.S’ crisis, on the other hand, only stems from the mortgage industry that has then spilled over in the form of unemployment and inflation.
Economic Crisis in Europe
The European crisis is the financial crisis, which affected some governments in Europe such that they were unable to repay their debts without a third party’s intervention (Haidar & Jamal 2012, p.123). The onset of this crisis was in 2007 when the government and private sector’s debt began to rise. This resulted from the “increased levels of private and government debts in the world, as well as the downgrading of debts owed by the government in various states in Europe” (MacCormaic 2011, p. 16). This crisis has threatened to split the European Union. In addition, the inability to sustain the wages and pensions by the government of Greece led to a debt crisis (Stephen et al. 2011, p.23). However, Greece tried to hide its financial position through the assistance of well-established banks in Europe (Louise et.al. 2010, p. A1). Some banking institutions benefited from this action although it was short lasted since the crisis soon became so glaring. Moreover, since the Euro zone uses one currency with variations in taxation in public pension regulations, it could not respond to this crisis with efficiency. According to Seth et al (2011, p.19), most banks in the European region had substantial debts, which made them to have their solvency questioned. This influenced more negatively on the economy.
This crisis worsened in 2010, 2011, and 2012. The European countries are therefore trying various intervention methods, but have not yet succeeded. Such methods include the creation of European financial stability facility, writing off 53.3% debts from individual creditors by banks, and the creation of a European fiscal compact (Pidd & Helen 2012, p. 5). The worst hit countries include Ireland, Portugal, and Greece. Spain also became hard hit in 2012 after its interest rates shot up and began influencing its power in capital markets. This led to its banks being billed out (Lewis 2012, p.17). Today, the European countries are working on integrating the European Union banking administration with all-inclusive oversight insurance in a bid to save the collapsing banks. The EU central bank is also checking on money flows through the provision of lower rates of interest besides giving the failing banks cheap loans. This follows because money lending contributed a fabulous deal in this crisis (Foldvary & Fred 2007, p. 2). European countries have also begun implementing the Euro plus Pact. This pact aims at changing the political standing, the monetary position, and the competitive ability of the European region. Economists have also advised on the need for addition of investments on the public besides levying of friendly taxes that consider growth especially on wealth, property, private sector, and financial institutions as key ways of ending the crisis. The European crisis threatens the unity of the European Union. Leaders in this region are also increasing European Investment Bank funds. This has also influenced politics and leadership in some European countries, for example, Greece, Ireland, Portugal, Spain, Italy, and France.
Why it is severe in relation to that of the U.S: From
Neoclassical theory point of view
First, the European crisis is more severe than that of the United States because of the unemployment factor. In Europe, there is less likelihood of employment stabilisation at the equilibrium because unemployment is resulting from national debts more than the individuals are. This means that, since this economy is dependent on a third-party intervention, there is a likelihood of this economy taking many years to recover to restore full employment. On the other hand, the U.S’ crisis is majorly resulting from mortgage firms through banking industries to the government and the people (Czuczka 2011, p.10). Hence, intervention is easier when it comes to unemployment in the US. This holds because not many people are employed by the falling mortgage industry. Hence, it may take time before the US’ people are fully affected. This follows because, in a free market, the fall in wages increases the demand for labour. Hence, equilibrium is restored when there is full employment.
Secondly, the classical view of demand and supply indicates that, whenever there is an increase in output of services or goods, there will be an automatic rise in spendable income in order to acquire the services and goods. One can therefore deduce that the economic crisis in Europe is more severe than that of the U.S because, in the U.S, the crisis that is resulting from the mortgage industry will take time before it affects the country’s supply compared to that of the European crisis, which began by affecting the supply itself hence limiting demand. Unemployment resulted from inability by the governments in the European zone to repay their debts hence reducing the available income to pay the employees (Czuczka 2011 p.12). This is more severe compared to the recession projected to affect the U.S since there is more internal problem Hence, equilibrium is likely to be restored by a similar process. Thirdly, the quantity theory of money is given prominence in controlling inflation by the neoclassical economist. When applied in both cases of Euro and the U.S’ crisis, the European crisis emerges more severe. This follows because, according to this theory, the product of the amount of money available for circulation coupled with the velocity of its circulation equal to the product of the average level of prices and the number of transactions that take place (Nicolas & Firtli 2010, p.12). In the case of the Euro crisis, the equation will not apply since the amount of money in circulation is already low due its much dependence on third parties’ aid and the speed of its circulation, which is still low due to the unemployment issue. Hence, these cannot equate the price levels and the transactions taking place (Nicolas & Firtli 2010, p.12). On the same note, different levels of taxation in different countries may also affect the euro crisis since some countries such as Greece had increased money supply hence setting in inflation.
Endogenous Money Theory
First, according to this theory, loans create the deposits. Therefore, the inability of the European countries to refinance their loans may worsen the economic crisis in Europe. This seems more severe than in the U.S where the inability to repay mortgages lies in the hands of house buyers rather than the government (Sicilia 2012, p.4). Therefore, banks in the European countries may not even have money to lend since there are no willing borrowers due to unemployment and unpaid wages. This makes the situation more severe than in the U.S. Secondly, in the endogenous theory, a bank can never suffer from capital constrains because banks can be able to obtain funding for their reserves: the central bank or the interbank market. In the European zone, countries have not been able to repay their loans alone because the central banks in these nations suffer from capital constrains. This means that there are no funds for internal loans. Thus, the national economies of these nations have to depend on foreign nations.
On the other hand, in the U.S, the central banks have not yet been hit by the recession. Hence, it can be able to provide loans and play an oversight role (Fratianni & Marchionne 2009, p.13). This means that the economy of the U.S can be revived using the loans distributed from the central bank to other banks. Thirdly, according to this theory, banks will pursue all profitable opportunities to lend money. According to Polleit and Thorsten (2007, p.4), if this money is easily available, the banks will easily lend it hence leading to a crisis. This therefore means that the European countries may face difficulties in ending the economic crisis facing them since banks are not able to obtain money from their central bank unless this money is borrowed. Their inability to re-service loans may also mean that the banks will have a problem in controlling the circulation of money to other loaners. The profit margins for the banks will also be reduced. On the other hand, the economic crisis facing the U.S is not as severe as that of the Euro zone since the banks in the U.S have capital reserves to lend to low income borrowers. They can also be able to obtain more reserves from the central bank. The loaners can therefore be able to pay wages and even start new investments, which will raise the profit levels.
In order to curb the economic crisis, the European countries have found the following based on research on the topic. These include enactment of macro-prudential supervision where the countries create financial stability oversight councils to identify the risks that may threaten the financial wellbeing of these nations (Boak 2008, p.6). Promoting market discipline and communication, for example, will put an end to the financial cushion thus protecting the countries from any losses of non-financial and financial institutions in the case of a crisis besides responding to threats that may emerge in the financial wellbeing of these countries (Wynne 1992, p.19). Enactment of micro-prudential supervision will supervise and regulate thrifts, banks, holding companies, and the non-bank institutions.
This majorly covers the financial organisations besides utilities of financial markets (Sculmeister & Stephan 2011, p.9). Correction of key aspects of the regulatory framework will control elements like accounting standards, capital rules, and credit controlling agencies. According to Aversa and Jeannine (2009, p.8), banks should also begin lending freely. Crisis management and resolution framework will address the risks of lending and borrowing besides guaranteeing finance, products, and concentration of any financial markets disrupters, for example, the provision of insurances (Gullapalli et.al. 2008, p.6). Consumer protection will regulate consumer financial services and products in order to attain similar standards. The consumer protection agency also ensures that accurate information is disseminated to the consumers concerning the products and even services. This will protect customers from hidden charges, deception, and abusive conditions during the exchange of goods and services (Andrews 2008, p.3).
In conclusion, the European crisis is the economic crisis that affected most countries in the European zone when they became unable to refinance their debts without the intervention of third parties. The United States’ crisis is the economic crisis that faced the United States due to the inability of the house buyers to repay their mortgages. The crisis indeed affected banks due to their uncontrolled borrowing and unstable lending rates. Increase in lending rates made many borrowers unable to repay their debts. As a result, there was increased unemployment in the country. This economic crisis led to the increased recession in the country. The European crisis is more severe than the United States crisis. According to the neoclassical theorist, there is less likelihood of stabilisation of employment in Europe compared to the United States.
Increase in spendable income because of increased output in supply is also less likely to happen in Europe compared to the United States. The endogenous theory also supports the view that the economic crisis in Europe is more severe than that of United State because banks create lending. Banks cannot also lack reserve capital and are likely to pursue any profitable lending opportunity in line with their capital reserve. Therefore, the European countries may have a longer period of economic crisis compared to the United States where banks have not yet run out of reserve capital. To get out of these crises, countries have enacted various common trends. These include macro-prudential supervision, micro-prudential supervision, correction of key aspects of the regulatory framework, crisis management and resolution, and consumer protection. According to Krugman (2010, p.23), there is a possibility of recurrence of these economic crises if strong measures are not taken.
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