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When Draghi pledged to throw everything including the “kitchen sink” at the problem in the EU to sustain the Euro and the economy, it was still only a matter of time before even the kitchen sink failed to make an impact (Hildebrand, 2015). The problem in the European economy was precipitated by the fact that a number of nations simply did not belong in the EU and did not have the economic status to benefit from a common currency with other states, as Milton Friedman and other economists pointed out in the 1990s (Trumbull, Roscini & Choi, 2011). States like Greece, Ireland, Spain and Italy lacked the necessary clout to be anything other than a drag on a Union in which each state shared a currency. Greece had been brought into the EU under dubious pretenses and its debt bomb was now exploding. The ECB had to respond, along with the IMF, to ensure that the debt bomb was contained and did not wipe everyone out. If Greece defaulted, the banks would eat the loss. If Greece was bailed out to the tune of hundreds of billions through a bond-purchasing program similar to that in the U.S. where the Fed spent approximately $2 trillion...
The ECB could cut rates and effectively kill the savings of everyone in the market, forcing yield-starved investors into risk assets (and the ECB would not stop at bailing out Greece but would also go on to buy corporate bonds, essentially propping up the entire market by giving easy credit to companies that they might go on—over-leveraged—for a short while longer). Now, with the Fed raising the Fed Funds rate and cracks already appearing in the market after barely a 100 basis point move in interest rates, there appears to be a major problem going forward: the banks cannot raise rates because everyone is leveraged to the hilt and cannot afford to pay more interest on their loans. At the same time, the banks have to raise rates in a belated attempt to stave off inflation and to give room for more easing when the next downturn occurs at some point in the next few years. The ECB did not really respond less aggressively than the Fed. It took…
The eurozone package is politically more complicated. it's designed to show that 16 nations sharing the euro currency will stand united behind the debts of member nations to stave off a potential crisis of confidence that could damage them all." (Trumbull, 1) This complexity is underscored by the inherently questionable imperatives of the European Monetary Union. Indeed, one of the core challenges of free trade, globalization and the establishment of
If asset bubbles can be leading indicators of recession, that begs the question what assets are the most important? Several studies have shown that housing prices are critical. They were important in Japan and in 2008 in the United States. Babecky (2012) showed that housing prices consistently predict asset bubbles, minus the occasional false positive. Intuitively this makes sense since any sort of bubble will result in more investment in
European Debt Crisis Beginning in 2010, Europe was plunged into a major financial crisis. This is because many of the weaker member states (i.e. Greece, Spain, Portugal and Ireland) were running high deficits to finance different social programs. When the economy was strong, these initiatives were used as a way to help win the support of the electorate. At the same time, many individuals believed that this kind of approach was
In other words, there are few controls in place to ensure responsible spending or, in the case of Greece, that the books are not cooked. The implication of this is that Greece makes errors and commits fraud, knowing that the eurozone will be forced to bail them out or risk grave instability. The other nations are then forced to bail Greece out, because they share a common currency and
European Union and Euro Currency Crisis One of the major long-term issues that have damaged the euro is the fear about whether the governments in Greece, Portugal, Ireland, Spain, and Italy will honor their $4.2 trillion debts (Burgen, 2012). Failure to honor these debts has far reaching consequences on European banks which own these countries debts. Struggling banks are likely to suffer investors' confidence and credit. Countries that are beneficiaries of
History of the euro can be traced back as far as World War II when European leaders agreed that economic ties could promote growth in Europe (Martel). As a result of the Bretton Woods (New Hampshire, USA) agreement of 1944, the International Monetary Fund (IMF) opened for business in 1947 and a fixed rate of exchange was set between the U.S. dollar and other world currencies, based on the gold