Ali Wright |
To what extent is the current Eurozone crisis a consequence of the 2008 financial crisis?
The Eurozone crisis is a result of the 2008 financial crisis to some extent, as following the 2008 financial crisis many governments were forced into bailing out banks. This resulted in governments storing up large debts, leaving some of them bankrupt. An example of a government stranded following the financial crisis is Greece. Greece’s government deficit rose significantly and with other countries within the Eurozone being reluctant to lend money at a low interest rate; Greece was forced into borrowing at high interest rates. This in turn led to a further increase in the debt of Greece’s government, thus contributing to the Eurozone crisis which still stands today. However, the current Eurozone crisis is not a consequence of the 2008 financial crisis entirely because it is also due to the individual collapse of European countries’ economies e.g. Greece, Spain and Italy not helped by sharing a single currency. Arguably the Eurozone crisis would have occurred anyway due to structural faults in the Euro design. The 2008 financial crisis came about after an extraordinary boom in the economy, most predominantly seen in the property market. Many factors led to this exceptional boom in the economy, most notably China and their cheap exports. Increased involvement in trading with China drove both interest rates and inflation downwards. This left people feeling more confident about the buying power of their money, allowing them to spend more freely. As a result of the low interest rates and inflation, there was also a boom in housing prices in the West, particularly in America and the United Kingdom. Before the boom the housing market in the United Kingdom was dominated by Building Societies. Building societies would often calculate how much they would lend to someone for property in a relatively cautious way as roughly 2.5 times the salary and the deposit usually around 12.5%. One contributor to the boom was that many banks started to increasingly involve themselves in the property lending market. Banks did this in order to increase their profit margins. Yet, an increase in competition meant that banks were willing to over lend to customers. This resulted in many people borrowing far more than they could afford to; meaning that what was initially meant to increase the profits of banks across the United Kingdom and America, ironically ended up costing the banks as customers defaulted on their payments . Governments were then forced into attempting to bail out the banks, increasing government debt. A good example of the United Kingdom government having to bail out a bank was in February 2008 when Northern Rock was nationalized by the government. This was because savers felt uneasy about whether Northern Rock could continue to trade due to its precarious financial position and concerned about the safety of their money, wanted their money back from Northern Rock; however, Northern Rock did not have sufficient money available as a result of mortgage defaults and savers withdrawing cash exacerbated their already precarious financial position. Due to this the government had to intervene and nationalize Northern Rock, further adding to the debt created for the government itself. The Eurozone crisis, which is currently an ongoing issue, came about after excessive borrowing from governments within the Eurozone. There was a big build-up of debts in both Spain and Italy which came about as a result of the financial crisis. Interest rates had fallen to exceptional lows in southern Europe countries when they joined the Euro. That encouraged a debt-fuelled boom which arguably meant that the Eurozone crisis was inevitable from the start. The Eurozone crisis was made worse due to deficit...