Category: Economic Crisis

Causes of the 2007-2008 Economic Crisis

The economic crisis of 2007-2008 had the most far-reaching financial repercussions for the U.S. economy since the Great Depression (Helleiner 2011). The significant increase in sub-prime mortgage defaults caused the bursting of a housing bubble. As a result of the growth in the number of defaults, the stability of financial institutions exposed to those mortgages was compromised. Following the collapse of several hedge funds in June 2007, panic broke out in numerous highly-liquid markets (Helleiner 2011). The US government-chartered institutions, Fannie Mae and Freddie Mae, were placed in a federal conservatorship program due to the significant losses experienced by them (Helleiner 2011). Moreover, authorities also had to prop up investment bank Bear Stearns in March 2008 (Helleiner 2011). The collapse of Lehman Brothers was an explicit signal that a market meltdown might ensue.

Securitization significantly contributed to the depth of the crisis (Lewis, 2015). This has to do with collateralized debt obligations (CDOs), and mortgage-backed securities (MBSs) issued by the U.S. institutions being purchased by foreign banks and hedge funds. Moreover, trading of credit risk was not restricted to mortgages but also included other asset-backed securities (Helleiner 2011, p. 70) such as car loans and credit cards, among others. Furthermore, credit risks that were sold and traded worldwide with the help of CDOs and MBSs were hedged via the credit default swap (CDS) and other derivatives (Helleiner 2011). The instrument was created in order to provide holders of bonds with insurance against defaults. However, a significant number of CDSs buyers were not holders of underlying bonds: their aim was to speculate on defaults of certain bonds.

Therefore, an enormous market for CDS contracts emerged. Its size exceeded $60 trillion at the beginning of the crisis (Helleiner 2011). The explosive growth of new types of securitization led to the increased confidence among market players because of the prevalent notion that new instruments were able to promote the stability of the financial system by distributing risks. However, mortgage lenders who were able to quickly sell mortgages started to overlook prudential concerns (Helleiner 2011, p. 70) in order to generate more fees from selling increasingly larger volumes of loans. MBSs and CDOs were bundled in such a way that it was difficult to determine their exact quality. Therefore, the rise in defaults led to dramatic consequences showing the lack of resilience of highly regulated individual financial institutions and other commercial actors. The diffusion of new financial instruments contributed to the intensification of panic over the inability to determine which institutions actually held these products and what their levels of exposure were (Helleiner 2011, p. 69).

The mortgage securitization was associated with the risks associated with over-relying on credit rating agencies, the ever-increasing significance of lightly-regulated firms, the opacity of OTC derivatives, the perils of crisis amplification across numerous markets and countries, and the concentration of risk in huge and interrelated companies (Helleiner 2011). It could be argued that these practices still exist today even though liquidity requirements have been changed, and capital ratios have been increased (Taylor & Baily 2014).

Tools for Forecasting Events and Predicting Crises

Role-Playing

Role-playing is a qualitative method of predicting events and forecasting crises in the business environment. This tool uses subjects who adopt the viewpoints of different groups in order to simulate interactions aimed at evoking reactions from decision-makers. Role-playing is used to test the alternative outcomes of a particular intervention (Armstrong, 1999). This tool is relevant for dealing with crises because unlike the method of the intention, which only helps to determine what actions can be taken by allowing subjects to adopt the perspective of decision-makers, role-playing helps participants to act out different scenarios. The advantage of this method is that it allows subjects to use their skills and knowledge during realistic interactions. However, group dynamics can negatively impact the process of role-playing. Evidence suggests that role-playing can be successfully used in the fields of the military, law, and business (Armstrong 2011).

Even though role-playing is more expensive than Delphi, which relies on independent expert opinions, it is more accurate. Moreover, situations that were brought about by the 2007-2008 crisis do not lend themselves to experimentation. Another argument for the use of role-playing for environmental forecasting has to do with the fact that the crisis was caused by unique factors such as defaulting mortgages and mispricing of the unregulated CDS market (Murphy n.d.). Therefore, analogies would not work as a method for predicting the outcome of interventions by relying on cases where similar interventions have been used. Role-playing, on the other hand, could have helped to predict the behaviour of actors such as government, financial institutions, local banks, credit rating agencies, renters, mortgage holders, and mortgage brokers among others.

Mispricing of CDSs was caused by the actions of mortgage bankers who were incentivized by loan origination commissions to just maximize the volume of issued mortgages because they were owned by other investors (Murphy n.d., p. 69). Moreover, statistical scoring procedures were provided with false or misleading inputs. Incentivized by the desire to sell more mortgages, lenders intentionally limited criteria for credit analysis based on the history of default rates (Murphy n.d.). Therefore, prior to the explosion in defaults, they were caught in the vicious cycle of borrowing that guaranteed them large profits. Role-playing could have been used to assess the actions of numerous players before the crisis. The behaviour of national government, local banks, financial institutions, credit rating agencies, borrowers, and economic advisors could have been modelled in order to predict the decisions of each party. Taking into consideration that decisions are difficult to predict, interaction stimulated by role-playing could have helped to forecast that lenders of original loans would have had inadequate incentives encouraging the creation of subprime mortgages. Moreover, the instrument could have helped to predict that heavy investment into various debt contracts by numerous financial institution will eventually result in their financial insolvency (Murphy n.d.).

Econometric Models

Econometric models involve analysis of information on causal relationships for making predictions (Johnson et al. 2013). This method is associated with the use of well-established theories, identifying key variables as well as specifying both forms and directions of relationships; therefore, it is useful for forecasting events that triggered the crisis of 2007-2008 (Hendry & Nielsen 2012). Whereas the extrapolations method presupposes that current trends will continue, econometric models only consider the constancy of the current relationships; therefore, they are more precise. Moreover, econometric models allow comparison of alternative approaches with one another in a relatively objective manner. Dynamic stochastic general equilibrium (DSGE) models and the New Area-Wide Model (NAWM) provide a fairly adequate interpretation of international factors contributing to the development of the crisis. These macro models can help test the internal consistency of a particular economic theory with the data (European CentralBank n.d., p. 9) thereby creating important clues for the interpretation of business cycle dynamics.

It should be noted that the financial crisis has revealed some weaknesses in both DSGE and traditional models, leading some experts to criticize their forecasting value (European CentralBank n.d.). Mainstream macroeconomic models have complex procedures, have a lack of data on casual variables and are expensive (Armstrong 1999). Moreover, unrealistic assumptions, lack of attention to financial frictions, and the role of the banking sector and to non-linear dynamics or interrelationships (European CentralBank n.d., p. 9) are some of the major disadvantages of this forecasting method. However, unlike extrapolation method that did not prove to be particularly accurate in the wake of the economic crisis because of its reliance on the past relationships between the causal factors, macroeconomic models are a fairly useful forecasting instrument that could be used to interpret economic developments in real-time.

How Organisations Can Survive a Crisis

Forecasting tools should be used in the initial stages of crisis management models. The crisis arc is a model for crisis management proposed by Hilburg (Crisis Management Model n.d.). To successfully handle a crisis, a manager has to recognize that every prevention and management strategy for coping with the uncertainties of the external environment consists of the following elements: crisis avoidance, crisis mitigation, and crisis recovery. Effective crises management strategy requires the careful evaluation of all vulnerabilities of an organization as a potential catalyst of a crisis (Crisis Management Model n.d.).

According to James, a typical crisis consists of the following phases: signal detection, preparation and prevention, damage containment, recovery and learning (cited in Wooten & James 2011). The first phase requires the detection of the early signals of a crisis. The second phase involves actions aimed at the aversion of a crisis. The third phase prevents a crisis from spreading to other departments of an organisation. The recovery phase entails the development of plans for renewing business operations. The final phase is associated with reflection and learning from a crisis (Wooten & James 2011). The first two phases of the model can be considered a part of a proactive approach to the process of crisis management; therefore, it is best suited to a crisis.

According to the crisis management model proposed by Gonzalez-Herrero and Pratt in 1996, there are three stages to crisis management: diagnosis of the crisis, planning, and adjusting to the changes (Crisis Management Model n.d.). The model presupposes regular monitoring of early indicators of a crisis through observation of employee performance and maximum levels of transparency. Therefore, it operates within the framework of structural functions systems theory by facilitating the proper flow of information across all hierarchies of an organization.

Five Phases of Crisis

Signal Detection

Signal detection is a phase in crisis management associated with analysing available information that is available at the moment of decision making. According to a recent study by the Institute of Crisis Management, only 30% of crises that occurred during the last decade were sudden, whereas the remaining 70 percent were characterized as smoldering (Penuel, Statler & Hagen, 2013, p. 629). Therefore, signal detection is a phase in a crisis cycle that has to be recognised in a timely fashion.

Prevention and Preparedness

The second phase of James crisis management model is prevention and preparedness. This phase is associated with systematic planning to prepare the organization to deal with a crisis, explicating critical personnel, resources, and actions to be allocated during the crisis situation (Penuel, Statler & Hagen, 2013, p. 630). According to an article that explores the management of the 2007-2008 crisis, coordination issues between different financial institutions of Europe were conducted through a combination of ad hoc and existing instruments (Pisani-Ferry & Sapir 2011). Therefore, the managers of those institutions were not focused on all modes of preparation and coping measures during the second phase of crisis management. Arguably, this phase can be divided into two different sets of activities, as in the PPRR model, in order to better prepare for a crisis before it presents itself.

Damage Containment

The damage containment phase involves mitigation of a crisis, aimed at preventing it from further escalation, resulting in severe damage to an organisation. Systematic interventions in the source of a crisis (Penuel, Statler & Hagen, 2013, p. 630) are an essential element of this phase that helps to minimise the impact of a crisis and prevent it from spiralling out of control. Proper contingency planning, which should be a part of the previous phase of crisis management and should include communications strategy, can help to protect an organisations reputation, assets, and infrastructure when a crisis is unfolding (Penuel, Statler & Hagen, 2013).

Recovery

The fourth phase of crisis management involves fixing the damage caused by the crisis (Penuel, Statler & Hagen, 2013, p. 630). During this stage, organisations ensure their business continuity and resume their linkages with all groups of stakeholders. Just like the previous phase, recovery is highly dependent on contingency planning and preparedness. A properly constructed communications strategy is also essential to an organisations survival during the recovery of critical structures and procedures.

Learning

The final stage of James model is associated with the development of crisis management-specific organizational learning (Penuel, Statler & Hagen, 2013, p. 632) that should include experience gained during the dissemination of a crisis both within an organization and for its constituents. The obtained knowledge can help to modify the practices and policies of an organization in order to make it more resilient to future shocks.

Leadership Lessons for Senior Management

Successful leaders should be able to correctly identify stages in a crisis life cycle and apply a complex set of skills, abilities, and competencies for planning, responding to and learning from crisis events while under public scrutiny (Wooten & James 2011, p. 2). The conceptual model by James could significantly enhance the capacity of leaders to lead an organization through the various crisis phases and into a successful recovery (Wooten & James 2011, p. 2). Examining a crisis with the help of James framework helps to develop a structure for framing the process by filtering knowledge and by providing a roadmap for decision making (Wooten & James 2011, p. 4).

The shock caused by the crisis had a spill-over effect that fundamentally changed the correlations between international stock markets. The economy was not responsible for the crisis but rather a chain of poor managerial decisions, such as the take-over of Merryll Lynch and allowing the failure of Lehman Brothers (Hausman & Johnston 2014, p. 2720). Therefore, the senior management of both financial and political institutions of the country have to carefully consider the underlying factors that led to the crash of the markets in order to derive important lessons from its consequences.

Interdependence among global markets is one of the reasons why mistakes originating in the US credit and housing markets produced such devastating effects on the global economy. In order not to repeat similar mistakes in the future, it is necessary not only to create better oversight of financial institutions and tightening mortgage markets (Hausman & Johnston 2014, p. 2720) but also to introduce changes to formal governance structures and composition of their teams. An important leadership lesson that can be taken away from the crisis of 2007-2008 is that every crisis is a deviant event that requires people who are able to act in nonconventional ways, recognise the unknowable and move beyond their initial emotional reactions.

Nobody would deny that revising organizational structures and implementing changes are some of the greatest challenges that leaders can face. These actions are associated with a tremendous amount of strategic planning and assessment that could help inadequately reacting to the important idiosyncrasies of a problem and to choose the right direction to take. Nonetheless, effective leaders have to find structures and processes that mobilise members of their organization and challenge thinking while retaining productive power-resistance relations. It should be noted that productive dissent can engender communicative practices that play a facilitative role, resulting in organizational change based on transformation of knowledge (Thomas, Sargent, & Hardy 2011, p. 25).

Effective leaders should possess the perspective, mentality, confidence, and authority necessary for implementing radical structural changes. Moreover, they have to espouse certain attitudes so that they can engage in implementation activities as well as have in-depth knowledge of the tasks that should be accomplished. The most important implementation activities for introducing changes to organizational structures and process are communicating, mobilizing and evaluating (Battilana et al., 2010). Leaders who are willing to call for radical changes have to emphasise both the task-oriented and the person-oriented behaviours that are necessary for the comprehensive implementation of more effective organizational designs (Battilana et al., 2010). Person-oriented leaders have to realise that post-crisis change projects require building coalitions that can support the process of redesigning organisations. Therefore, they have to consider careful approaches to all groups of stakeholders in order to overcome growing concern over the impact or restructuring of organizational settings.

Lack of innovation made a significant contribution to the severity of the financial crisis of 2007-2008. Even though this did not directly contribute to the financial meltdown, numerous think tanks and government agencies agree that it was a significant symptom of a more generalized problem resulting in this crisis (Hausman & Johnston 2014, p. 2722). Effective leaders have to consider how to stimulate innovations that can significantly contribute to a strong economy, thereby preventing similar negative developments in the future.

Another important lesson that senior managers should take away from the crisis is that it is essential to utilize both quantitative and qualitative forecasting methods during the process of seeking signals. It will help them to better understand the specific risks of an approaching crisis as well as eliminate some of the unrealistic assumptions created by macroeconomic models.

Conclusion

The economic crisis of 2007-2008 had the most far-reaching financial repercussions for the U.S. economy since the Great Depression. It was caused by numerous factors ranging from defaulting mortgages to mispricing of CDSs. Taking into consideration the fact that the crisis put an at-risk financial system of the country, it is necessary to consider important leadership lessons of the situation in order to avoid similar events in the future.

Organization leaders can guide their organizations through a financial crisis by utilizing quantitative and qualitative forecasting tools such as role-playing, Delphi, analogies, extrapolation, rule-based forecasting, and economic models, among others. Taking into consideration that situations that were brought about by the 2007-2008 crisis do not lend themselves to experimentation, role-playing can be effectively used to test alternative outcomes of a particular intervention or an event. Economic models is a quantitative method of forecasting that can help organization leaders to use well-establish theories in order to identify key variables and relationships between them.

Effective leaders should also make use of the crisis management models such as the crisis arc proposed by Hilburg, James model, and Gonzalez-Herrero model, among others. Organization managers have to find structures and processes that mobilise members of their organizations and challenge thinking while retaining productive power-resistance relations. Moreover, they should possess the perspective, mentality, confidence, and authority necessary for implementing radical structural changes in order to avoid similar crises in the future.

Reference List

Armstrong, J 1999, Forecasting for environmental decision making, in V Dale and M English, eds., Tools to aid environmental decision making, Springer-Verlag, New York, pp. 192-225.

Armstrong, J 2011, Principles of forecasting: a handbook for researchers and practitioners, Kluwer Academic, Boston.

Battilana, J, Gilmartin, M, Sengul, M, Pache, A & Alexander, J 2010, Leadership competencies for implementing planned organizational change, The Leadership Quarterly, vol. 21, no. 3, pp. 422-438.

Cheung, W, Fung, S, & Tsai S, 2010, Global capital market interdependence and spillover effect of credit risk: evidence from the 20072009 global financial crisis, Applied Financial Economics, vol. 20, no. 1, pp. 85-103.

Crisis Management Model n.d., Web.

European Central Bank n.d., Some lessons from the financial crisis for the economic analysis, Web.

Hausman, A & Johnston, W 2014, The role of innovation in driving the economy: Lessons from the global financial crisis, Journal of Business Research, vol. 67, no. 1, pp. 2720-2726.

Helleiner, E 2011, Understanding the 20072008 global financial crisis: lessons for scholars of international political economy. Annual Review of Political Science, 14(1), 67-87.

Hendry D & Nielsen, B 2012, Econometric modeling: a likelihood approach, Princeton University Press, Princeton.

Johnson, G, Whittington, R, Scholes, K, Angwin, D & Regner, P 2013, Exploring strategy: text & cases, 10^th edn, Pearson, Harlow.

Lewis, M 2015, The big short: inside the doomsday machine, W. W. Norton & Company, New York.

Murphy, A. n.d., Financial crisis of 2008, Web.

Penuel, K, Statler, M & Hagen, R (eds.) 2013, Encyclopedia of crisis management, vol. 1, SAGE, Los Angeles, CA.

Pisani-Ferry, J & Sapir, A 2011, Banking crisis management in the EU: an early assessment, Economic Policy, vol. 25, no. 62, pp. 341-373.

Taylor, J & Baily, M 2014, Across the great divide, Hoover Institution Press, California.

Thomas, R, Sargent, L & Hardy, C 2011, Managing Organizational Change: Negotiating Meaning and Power-Resistance Relations, Organization Science, vol. 22, no. 1, pp. 22-41.

Wooten, L & James, E 2011, Linking crisis management and leadership competencies: the role of human resource development, Advances in Developing Human Resources, vol. 10, no. 3, pp. 352-379.

In America, the majority of citizens wish to live the elusive American dream. However, the idea of being financially comfortable does not always come true for everyone, especially for families living below the poverty line. It is even harsher on children who live in such families. In the PBS documentary, Poor kids season 2017 episode 21 aired on 21^st November 2017, the director brings to light the tight situations the children have experienced growing up in destitution.

The director takes the audience through the lives of three families living with little provisions. The documentary concentrates on the plight of the children in these households (Frontline, 2017). There are lengthy interviews with the young ones, which are momentarily broken by shorter interviews of their guardians. The director is tactful in portraying the children without hiding the unappealing details of the little chance they have at a normal prosperous life. Some of the juveniles have to help provide food, contend with less than three meals a day, and become homeless.

Conceivably, the films most alluring view is the simple way the children can describe their challenges. Brittany Smith, a middle school student, explains the agony of a shower with cold water in a snowy winter because the father could not pay the electricity bill on time. Her big brother, Roger, talks about the false impression people have on their family. Any visitor would think they are financially comfortable, but Roger reveals that his parents acquired the play station and the flat-screen television when they were in a better situation. In addition, the youngsters are worried about their unborn siblings life if their financial state remains the same.

A teenager, Johnny, dreams of playing football, but his parents are too poor to afford a soccer program. The households situation is so dire that his family lives in a homeless shelter. By the end of the film, Johnnys family manages to relocate to transitional housing, which is a challenge to his pregnant mother because she will be forced to increase her expenses with no additional income. Moreover, Johnny highlights the depth of stigmatization his family faces in the community. The boy states that he did not want his classmates to know where he lives. Prejudice from friends at times leads to bullying and a negative psychological effect on young children.

The director also presents Kaylie, a ten-year-old girl who is energetic and brave despite her unstable home situation. Her mother, a single parent, is trying all she can to provide for Kaylie and her brother as they move around Ohio. The boy is forced to mow lawns to help the mother with money for food. The family moves from motel to motel, and the kids cannot attend school, which worries Kaylie as education is her only hope for a better future. It is encouraging that the young lady thinks about the education and future career.

Some interesting updates occur at the end of the film, where five years later, Johnny lives with his grandmother after completing his sentence. His sister Jasmine is in high school and lives with her struggling parents. Unlike the brother, it is encouraging that Jasmine managed to stay in school. Additionally, Kaylie and Tyler moved to different locations but still feel stuck in poverty. Tyler dropped out of high school because he felt neglected by the mother. His sister Kaylie is worried about the medical situation at home as her mother is diagnosed with ovarian cancer. In turn, Roger and his sister have both graduated from high school.

This documentary clearly depicts the effect poverty can have on children. Most of the young ones in the movie ended up dropping out of school or in jail. I am pleased with some resolution, for instance, Johnnys reformed after his jail term. However, I am disappointed by Tylers decision to drop out of high school. Education is an option which can get these children out of poverty. A great lesson is that I have learned to appreciate the little life has to offer, such as the food.

Reference

Frontline. (2017). Poor kids season 2017 episode 21 [Video]. PBS. Web.

There are many microeconomic issues which affect American cities, and one of the most prominent of them is the housing crisis. In New York, the problem with the rising rent and a growing homeless population is particularly notable and attracts considerable attention of local media. In the article, Eric Adams Faces Pressure on New Yorks Housing Crisis as Rents Rise, Mihir Zaveri and Dana Rubinstein explore the microeconomic phenomenon of New Yorks crisis.

The article talks about the rising housing prices in New York and presents information on the severity of the problem. Essentially, in New York City, approximately 30% of people who rent property spend more than 50% of their income on rent (Zaveri and Rubinstein). Moreover, there are almost 50,000 people who spend their nights in New Yorks shelters for homeless individuals. Additionally, the number of people who come to shelters in search of a place to stay during the night has been gradually growing over the several years. In Manhattan, the median rent in April 2022 was $3,870, which is more than 30% higher than during the same period in 2021. It is also the highest level of rent in the history of Manhattan. Finally, the article states that as of 2021, New York City lost nearly 100,000 properties with rent of less than $1,500 per month over three years. At the same time, over the same period, the city gained 107,000 units with rent of more than $2,300 per month (Zaveri and Rubinstein). Although the mayor promises to tackle the problem, he does not have any plan to offer yet.

Thus, based on the information presented in the article, it is clear that the microeconomic issue at hand is the housing crisis in New York. Specifically, it explores the growing rent prices, which make it more difficult for people to pay for the property. Moreover, the microeconomic issue ultimately affects the quality of life of the residents. Taking into consideration the fact that there is a large number of New York residents who spend half of their income on rent, it is likely that these individuals are forced to cut their expenses. Another issue arising from the housing crisis problem is the growing number of homeless people who cannot afford their place and need to stay in shelters.

In my opinion, the housing crisis in New York will certainly worsen in the near future if the current trend continues to persist. The rising rent prices are a major concern for many cities nationwide, and in the case of New York, it is exceptionally noteworthy. The actions of the current mayor demonstrate that the issue of the housing crisis cannot be solved easily, and therefore requires a comprehensive approach. At the same time, considering the costs of land and construction works in New York, it is unlikely that it can be tackled by building new residential properties. One of the most effective options for overcoming the issue is providing financial incentives to residents who decide to rent properties in less popular parts of the city. Nevertheless, despite potential efforts, the housing crisis is still expected to remain a topical issue in New York.

The article, Eric Adams Faces Pressure on New Yorks Housing Crisis as Rents Rise, offers an insight into the microeconomic issue of the housing crisis in New York. The city experiences a steady rise in the level of rent prices and subsequently suffers from the increased homelessness. New York can implement incentives to motivate people to rent property in less populous parts of the city in order to keep rent at an appropriate level.

Work Cited

Zaveri, Mihir and Dana Rubinstein. Eric Adams Faces Pressure on New Yorks Housing Crisis as Rents Rise. The New York Times, 2022.

Introduction

Between the last quarter of 2007 and early 2009, the world went through a serious economic crisis that left several economies vulnerable. Greece was no exception. In 2010, following the aftermath of the 2009/2009 global crisis, Eurozone fell to the effects of the remedial measures tabled against the global financial crisis. With the consolidation of the European countries into an economic block, members with relatively less effective fiscal and monetary policies faced the brink of economic failure (Arghyrou and Tsoukalas 38). Greece, suffering from inconsistent leadership guided by the desire to impress the populations and supporters, presented an ample zone for fatal economic crisis. This paper seeks to explore the root causes of the Greek economic crisis and elucidate the effects of the financial crisis in this relatively quiet European nation with rich historical culture.

Causes of the Greek financial crisis

In 2008, after a long period of economic growth and prosperity, financial crisis erupted in developed economies. Given the relatively stronger and robust economic and financial policies in the developed nations, the effects of the 2008/2009 economic crisis spilt over into weaker economies with the developed economic zone. Several countries fell into recession with Greece leading the affected countries in high debt levels.

Expansion of the public sector after entry into the European Union

Drivers of the Greek financial crisis draw inspiration from a buildup of blotted public service sector with high recurrent expenditure. When Andreas Papandreaou first took over the leadership of Greece in 1981, he introduced several public service jobs and employment opportunities with duplicated functions leading to increased expenses in the working sector (The causes: A very short history of the crisis n. pag). Similarly, his tenure began simultaneously with Greeces entry into the European Union. During this period, he took advantage of the several grants and agricultural subsidies introduced by the European Union the relatively poorer members. Even though the grants and blotted public services rewarded the disintegrated social groups marginalized by the previous regimes, they presented a system of over reliance on grant leading to lower productivity. The blotted public service continuously became unmanageable with the economic crisis becoming the final effect (Arghyrou and Tsoukalas 25).

Populist policies

During the period between 1981 and 1993, Greece leadership drew inspiration from populist policies that seek to answer to the public demands of the electorate. Creation of sustainable policies to check employment structures, financial problems, and poverty reduction received little focus as politicians focused on manipulating the electorate through tokens and handouts. In his second term, Papandreaou consolidated the creation of bureaucratic job opportunities. Comparing this trend to the style of leadership Juan Domingo of Argentina exhibited, Arghyrou and Tsoukalas (63) argued that his unscrupulous employment of opportunities increased the wage group to an unsustainable level leading to the increase in debt levels.

Corruption and cronyism

Greece with a rich culture of historical democracy and philosophy plunged into corruption, nepotism, and favoritism after the dictatorial leadership after World War II. During this time, leaders misused public resource and rewarded friends and cronies as the country plunged into gross economic failure. With the attitude of developing a corrective measure for these atrocities, Papanndreaou rode into leadership. However, while at the help of the countrys leadership, he shifted favoritism from friends and cronies to special interest groups that supported his campaigns. The Greek public service sector grew into gross insufficiency, corruption, and uttermost overstaffing. This increased the national wages and raised pensions. These factors coupled with strengthened trade unions and interest groups enjoying subsidies from the government worsened the situation. With the government continuously funding and subsidizing unprofitable business franchises under the groups, supporting their policies, economic crisis looked inevitable (Irwin n. pag).

Government deficits

Notably, the aftermath of the 1980 and 1990s financial policies downed on the Greeks economy in the first decade of the 21^st century. High monetary imbalances due to an expensive yet unproductive workforce between 2003 and 2006 created an environment for financial crisis. With the nations expenses increasing at annual rate of twenty-nine percent against nominal growth of thirteen percent an economic crisis remained in the offing. With tax revenue increasing at an annual rate of six percent, Greek balance sheet presented an inevitable state of insolvency. Even though increasing taxation provided a basis for improving the revenues from a blotted workforce, a taxation regime composed of greedy and corrupt cronies of political leaders presented an obstacle in taxation systems. Tax evasion and corruption further compromised the ability of the Greek economy to source for internal revenues to offset the negative balance sheet (Irwin n. pag).

Increasing debt levels

In the early 2000s, Greek enjoyed a relatively stable political system with great opportunities for righting the wrongs of the political class. However, lack of political will compromised the situation. In 2010, at the beginning of the Greek financial crisis, it fiscal remained evident that the fiscal imbalances reached inevitable levels. Political focus on the rewards to cronies and friends shifted to the demand for long-term solution to the rising debt level. Government needed a long-term remedy for the control of the national wage level as well as an economic solution to the elusive taxation system (Krugman n.pag).

Rent-seeking culture

This is a non-productive exploitation of resources in a system that acquires existing wealth such as money, privileges, and status as opposed instigation and creation of new wealth through sustainable productive activities relevant within existing market structures. This culture increases the rate of expenses in an efficient system with little regards to competitive and production rates of return on investment within a market system. Greek political leaders and their economic advisors mastered this culture with focus on job creation and consolidation of political support from the special interest groups. As Angelopoulos, Philippopoulos, and Vassilatos (290) explore in their study on the economy problems of the Greek nation, increases a countrys social economic problems. While calculating the social cost for the Eurozone, in relation to the fiscal and economic policies among individual member states, Angelopoulos, Philippopoulos, and Vassilatos (293) argue that economic crisis remained inevitable. Eurozone accrued eighteen percent losses of the tax revenues while individual nations like Greece suffered higher losses. With the Netherlands and Ireland leading on the best non-rent seekers, Greece recorded sixteen percent of tax losses on revenue. Corruption, nepotism, and sectional groups further worsened the situation in the rent seeking culture leading to increase in debt rates.

End of ideological divisions

For the past three decades, Greece leadership has remained under the hands of either the conservatives or the socialists. Even though these two groups hold noble development ideas on different manifestos, the regimes in the past thirty years focused more on rewards to political support rather than developmental ideas and agendas. Changing leadership crated a culture of corruption, nepotism, and favoritism (The euro crisis: What to do about Greece n. pag). Instead of developing concrete measures against the previous faults created by preceding regimes, the incumbent leadership ruled with an iron fist focusing on consolidating political power. Every leader voided development of risky policies that could check the tainted financial status of the Greek government. The shift from ideological rule to consolidation of power led to excessive misuse of resource forcing Greece into a state of insolvency (Krugman n. pag).

Control Measures

Inasmuch as the current Greek government suffers the wrath of the previous regimes, it harbors the constitutional obligation to develop measures to control the debt level and ensure adequate productive investment. After taking of the reigns in October 2009, the current regime keeps developing fiscal austerity measures within the internal finance systems to check on the government spending. Similarly, control and regulatory supervision of the tax systems and other revenue control machinery remains the driving force of the current regime. In order to check on corruption and tax evasion ills, the current regimes relies on strong and effective monetary and fiscal policies (The euro crisis: What to do about Greece n. pag). A consolidation plan to reduce spending and increase revenue collection is in place. Civil service acts as the back one of crack down on excessive government spending. The government cut down wages, pensions, and bonuses accrued to the civil servants since 2010. The measures coupled with monetary policy assistance from the European Union and the international finance institutions looks to help regulate Greek debt levels thus improving the economy (Arghyrou and Tsoukalas 91). Even though the results might take long to exhibit, the control measures in place hold high chances of success in the end.

Conclusion

Developing a strategy for successful economic development relies on strong and effective governance policies. Greek financial crisis took place following a series of failure in policy formulation and effective governance. Corruption, nepotism, and favoritism all work against political and economic prosperity. Despite the ill economic situation in Greek during the past few years, the country seems to develop a better recovery and reinvestment structure that will spur the historical nation into an economic powerhouse.

Works Cited

Angelopoulos, Konstantinos, Apostolis Philippopoulos, and Vanghelis Vassilatos. The social cost of rent seeking in Europe. European Journal of Political Economy 25.3 (2009): 280-299. Print.

Arghyrou, Michael, and John Tsoukalas. The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes. Munich: Center for Economic Studies, 2010. Print.

The causes: A very short history of the crisis. The Economist [London] 2011: n. pag. Web.

The euro crisis: What to do about Greece. The Economist [London] 2012: n. pag. Web.

Irwin, Neil. Greeces debt crisis could spread across Europe. The Washington Post [Washington] 2010: n. pag. Web.

Krugman, Paul. Greece as Victim. The New York Times [New York] 2012: n. pag. Web.

The European debt crisis poses a significant challenge to the economic stability of the European Union. Since economic stability is the basis of the European Union, the economic crisis seems to threaten a robust relationship that exists among member states. Currently, the European debt crisis has revived the need for integration of European member states since policymakers are reforming fiscal policies to curb the debt crisis.

Marinescu argues that the European debt crisis that has affected banking sectors and economic dynamics of various countries emanated from the global economic crisis that rocked many economies in 2007 and 2008 (95). Hence, it means that the debt crisis that European countries face has both internal and external factors that define economic dynamics. Therefore, what are the causes, implications, and solutions of the European debt crisis?

Numerous economic factors have contributed to the occurrence of the European debt crisis that is threatening the economic stability of the European Union. Marinescu states that long-term growth of credit, enormous liquidity, low-risk premiums, soaring asset prices, strong leveraging, and bubbling of real estate are dominant factors that increase the debit crisis (95). Failure by individual member states to control these factors cumulatively led to the occurrence of the debt crisis that has weakened the economic stability of the European Union. Since economic policies do vary in various states, policymakers have focused their policies in alleviating the impact of the debt crisis in each state.

The European debt crisis has a considerable negative impact on financial markets because they are very volatile and sensitive to the internal and external dynamics of the economy. Economic experts predict that the debt crisis seems to persist and will have a considerable negative impact on Europes economy. Europe is on the verge of economic crisis due to an increasing debt crisis, which has an overwhelming effect on economic stability and growth.

According to Valiante, for the European Union to survive economically, it must formulate integrated fiscal policies that are critical in stabilizing volatile markets that are prone to internal and external forces of the economy (11). In essence, policymakers should build strong fiscal policies to guarantee economic stability by reducing the impact of the debt crisis across all states. Thus, harmonization of both fiscal policies and trade policies is central in alleviating the economic impact of the debt crisis.

Since the European debt crisis appears to be a complex economic problem, fundamentalists and monetarists are two schools of thought that elucidate its occurrence. According to fundamentalists, the debt crisis did occur because various states lacked discipline in adhering to fiscal principles of macroeconomic management of finance. Hence, fundamentalists believe that strong fiscal policies that would strengthen and stabilize financial markets are essential in easing the impact of the debt crisis.

Comparatively, monetarists believe that the debt crisis originated from a liquidity crisis in a given locality. Collignon argues that a liquidity shock in a given locality triggers a rapid deterioration of a certain class of assets and reduces capital in banks, thus causing systemic financial crises across the world (1). In this view, liquidity of certain assets considerably affects the European debt crisis. Therefore, alleviation of the debt crisis requires long-term as well as short-term interventions for effective management of liquidity among European states.

The major economic challenge that the European Union is grappling with is the debt crisis. The debt crisis has been increasing for the past decades due to differences in fiscal policies that are in every state. Moreover, globalization forces of the economy coupled with unequal economic capacities of member states have contributed to an increase in the debt crisis. Hence, the harmonization of fiscal policies is critical for the European Union to curb the increasing debt crisis that threatens its survival.

Works Cited

Collignon, Stefan. Europes Debt Crisis, Coordination Failure, and International Effects. ADBI Annual Conference (2011): 1-27. Web.

Marinescu, Ana-Maria. The Debt Crisis: Causes and Implications. University of Ploiesti Bulletin 63.2 (2011): 95-104. Web.

Valiante, Diego. The Eurozone Debt Crisis: From its Origins to a Way Forward. Center for European Policy Studies (2011): 1-12. Web.

Greece economical power has been deteriorating every year. Currently, the country is facing a major economical crisis and it has been reported that the current poor economical situation in Greece has affected day-to-day lives of the citizens. Most people are struggling in order to meet their basic needs.

Because of this severe economical crisis, many economical analyst and other economists have predicted that Greece will face major economical hurdles in the future since the current level of debts are devastating. In this paper, we shall provide a general overview of the Greece economical crisis.

Throughout the discussion, the paper will highlight the main economical problems faced by Greece, the major causes of economical crisis, how the current economical crisis is affecting other European countries, and the measures that Greek’s administration has put in place to address the devastating economical crisis.

Economy of Greece

Before discussing the current economical crisis in Greece, it is imperative to provide a general understating of Greece economical status for the past few years. By providing such an overview, we will be able understand how the current crisis emerged and how deep the problem is.

According to the world trade organization and World Bank, Greece has been an economical powerhouse for a long time (Petrakis 12). According to another report released in 2010, the economy of Greece was ranked number 32 in the world in terms of nominal gross domestic product (GDP) (Charter 23).

According to the same report, Greece was also ranked as the 37^th largest purchasing power in the world (Charter 23). Because Greece is an economical powerhouse as well as a well-developed country, it has earned a membership in the European Union, Eurozone, World Trade Organization, the OECD, and the Black Sea Economic Cooperation Organization (BSECO) (Telegraph Media Group Limited).

On the other hand, Greece is one of the most developed countries in Europe and for many years, it has always been categorized as a high-income country (Telegraph Media Group Limited).

In addition to this, it has been reported that Greece’s service sector brings about 78 percent of the gross domestic product (GDP), industry brings 17.9 percent, and agriculture brings 3.3 percent (Telegraph Media Group Limited). Other public sectors including tourism contribute about 40 percent of the total economical output (Telegraph Media Group Limited).

History and the decline Greece economy

A study of the Greece economical history shows that Greece became economically stable during the 19^th century due to the great industrial revolution (Lynn 4). Recent research on economical development reveals that Greece has had a gradual economical growth over the years, which can be attributed to development in shipping industry and agriculture (Lynn 10).

It has also been reported that Greece experienced economical hardships towards the end of the 19^th century (Lynn 11). Other similar studies have also revealed that Greece became an economical powerhouse after the World War II. The Post World War II economical growth in Greece is popularly referred as “the Greek economical miracle” (Charter 31).

Looking at Greek’s history, it becomes apparent that Greece entered the Eurozone as early as 2001 (Charter 14). It is clear that economical development of Greece has been positive since the year 1961. For a very long time, “Greece has enjoyed a high standard of living and good Human Development Index (HDI) ranking top fifty in the world” (Lynn 15).

Over the years, Greece has enjoyed economical benefits from tourism, shipping, agriculture, textiles, chemical, metal products, mining, and petroleum products (Charter 32).

On the other hand, Greece economy has also faced many challenges slowing development in this particular country. Among the major challenges, include a number of significant problems such as rising unemployment, tax evasion, rapid corruption, and poor global competitiveness (Belkin 5). These among other factors have contributed to the current economical crisis in Greece today.

According to the EU data, Greece has been reported to have the worst corruption index (Belkin 5). In terms of corruption, Greece has been ranked second in Europe after Bulgaria and it ranks 80^th in the world (Belkin 8).

According to another report released by World Bank, corruption and tax evasion are the two major factors that have contributed to current economical crisis in Greece (Belkin 8). In fact, because of these two issues, Greece has not been able to overcome its ever-growing debts.

Emergence of economical crisis in Greece

As already mentioned, Greece has been an economical powerhouse for many years and its economical position has been a positive one since World War II (Petrakis 43). After a long period of economical development and growth, Greece went into recession in the year 2009 (Petrakis 43).

A study of the past economical trends reveals that for some time Greece has had a behavior of over-lending, which has contributed to loans exceeding hundred percent mark (Petrakis 44). This trend became more pronounced in the year 2009. It has been reported that by the end of 2009, Greek’s economy began deteriorating rapidly.

In the same year, Greece experienced the highest budget deficit and the government recorded the highest level of debts in the EU (European Union). In fact, in the year 2009 alone Greece’s budget deficit rose high above 15 percent mark. Because of this and other problems inclding the rising debts, borrowing cost emerged causing a severe economical crisis (Petrakis 42).

Towards the mid of year 2009, Greece was accused of attempting to cover up its huge budget deficit during the time when the world was facing an economical crisis too (Telegraph Media Group Limited). Because of this particular issue, the new socialist government that was appointed in 2009 revised the budget and this saw a reduction in the budget deficit by significant figures (Telegraph Media Group Limited).

Because of the continued economical crisis in Greece, there was a decline in shipping and industrial production, which was recorded to have dropped down by 8 percent (Charter 14).

Between the years 2010 and 2011, the industrial sector of Greece was the hardest hit. To be more specific, the garment industry and the housing sector were most affected and it is said that building activities recorded a massive reduction by 73 percent between 2010 and 2011 (Charter 41).

In addition to that, unemployment rates increased in a big way. It is estimated that unemployment rates skyrocketed by over 10 percent from as low as 7 percent to 20 percent (Belkin 9). This increase in unemployment rates saw over 900,000 people being laid off (Belkin 9). Because of this massive unemployment rates, the number of unemployed youths also rose up to 36 percent causing another major crisis in Greece.

The main economical crisis in Greece

Greece was accepted into the Economic and Monetary Union of European Union (EU) in the year 2000 after the European Council assessed the Greece economical crisis (Belkin 11). During this time, Greece had recorded high rates of inflation, budget deficit, increased public debts, and long-term interest rates (Belkin 12).

After an audit done in 2004 by the new socialist government, European statistics commission (Eurostat) revealed that the budget deficit was extremely high (Belkin 11). Today, Greek’s economical crisis is one of the biggest problems Eurozone is facing (Lynn 32). In fact, because of the economical crisis in Greece, the European Union has signed an agreement to use funds from both Europeans countries and International Monetary Fund (IMF) to help ‘financial-crippled Greece” (Lynn 42).

The main economical crisis in Europe has emerged as a result of years of unrestricted spending, cheap lending and lack of timely financial reforms (Lynn 22). These and other numerous factors left Greece stuck in a position of poor economical growth during the time when global economy went down too. Since the extent of the problems was beyond control, the level of debts in Greece exceeded the actual limits set by Eurozone.

It’s no doubt that the current debts are very high. In 2009 Greece debts was recorded to be standing at $ 413.6 billion (roughly about three hundred billion Euros) (Lynn, 47). Because of the decreasing economical trends in 2009, many financial analysts predicted that the debts would increase to 120 percent in 2010 (Charter 51). As per now, the current deficit is estimated to be standing at 12.7 percent (Charter 54).

Greece’s debt crisis

Graph: shows Greek debts compared to Eurozone Average (Petrakis 124).

The year 2009 is recorded as the worst financial year for Greece. It is said that in the year 2009, Greece faced major economical challenges resulting to the highest deficit ever (Charter 36).

Year 2009 marked the beginning of major economical crisis in Greece. At the end of 2009, Greek economical situation worsened and it experienced the most severe economical crisis (Telegraph Media Group Limited). This was caused by a number of factors such as the world financial crisis, uncontrolled spending and poor budgeting by the government (Telegraph Media Group Limited).

On the other hand, it is also said that Greek’s government was deliberately reporting false economical statistics in order to remain within the Monetary Union Guidelines (Eurozone) (Telegraph Media Group Limited). During this time, Greek continued to spend beyond its means.

Eurostat carried out another audit in May 2010 and the result revealed that the government deficit was around 13.5 percent, which is one of the highest deficit recorded in the world in terms of GDP (Petrakis 61). Because of the high deficit in Greece, there was a crisis in international community as it lost confidence in Greece’s ability to repay its debts (Petrakis 61).

However, after some consideration the international community including IMF and other Eurozone countries agreed to help Greece in resolving its financial crisis (Lynn 64). In order to receive a loan, Greece was supposed to meet some conditions. In May 2010, the IMF and Eurozone gave Greece a loan of about €45 billion (Telegraph Media Group Limited).

After being granted the loan, the Eurozone required Greece to develop strict monetary measures (Lynn 34). In addition to this, the European commission, European Central Bank, and the International Monetary Fund insisted that they must continue to evaluate the adoption and implementation of all the proposed measures (Telegraph Media Group Limited).

Today, the financial crisis and the strict measures put forward by EU and the IMF has contributed to mass actions, chaos, and public riots by the citizens across Greece (Lynn 27). However, despite of the loan granted to Greece and the strict measures, the government deficit has not decreased as expected. According to different economists and financial analysts, the budget deficit has not been reduced due to the subsequent recession (Lynn 56). As a result, Greek’s debt has recorded a continued rise.

Effects of Greece economical crisis

As already mentioned, Greece’s ability to repay its debts is one of the biggest problems the government is facing at the moment (Petrakis 112). After an extensive assessment of its ability, the Eurozone has reported that Greece’s potential to pay its current debts has been declared almost impossible.

Because of this issue, it has been viewed that Greece will soon become “a financial black hole” and people will shy away from making investment in this country (Petrakis 116). This means that the current financial crisis is likely to deepen since the country will continue struggling to repay debts as the interests rates also continue to increase (Petrakis 121).

The only solution that can really work is for the current government (The Greek government of Prime Minister George Papandreou) to implement harsh measures, which will reduce the national spending (Telegraph Media Group Limited).

On the other hand, it is very important for the government of Greece to make proper consideration that would not negatively affect other European countries. In its current economical state, Greece is already in a very bad financial position and it has already breached some of the Eurozone policies regarding deficit management (Telegraph Media Group Limited).

Because of this, fears are emerging that the current economical state of Greece will have severe effects on other European countries. The main worry is that, the behavior of breaching Eurozone policies by Greece will be infected to other European countries that are also facing economical hardship (Telegraph Media Group Limited).

Measures to curb the current economical crisis

What is Greece doing to control the current economical situation? This is a question of whether Greece government is committed to restore its country back to a state of financial stability. Indeed, Greek’s government is committed towards restoring economical stability.

Foremost, the government has begun reducing spending and it is already implementing economical policies, which are aimed at reducing the current deficit by not less than €10 billion (Telegraph Media Group Limited). As such, the government has increased tax on basic commodities and products including fuel, alcohol, tobacco, developed tough tax evasion penalties, raised the retirement age, and forced public sector pay cuts (Belkin 13).

However, because of these measures by government, chaos has been reported across the country. In some of the big cities, people have staged strikes abandoning work and closing airports, offices and schools (Petrakis 113). The bad news is that this kind of mass action has been on the increase and is expected to become more rampant in the near future (Petrakis 110).

How European Countries are helping Greece to resolve its economical crisis

Most of the European countries are committed to help Greece overcome the current economical crisis. Led by Germany’s Chancellor Angela Merkel, all the European countries (16 countries that make up the Eurozone) have signed an agreement to help Greece restore its economical status (Charter 67). This move by the European countries is being seen as the “last resort that will involve co-ordinate bilateral loans” from all countries in Eurozone which use the common currency (Charter 71).

In a move to help “the sailing neighbor”, most of the economically stable countries in Eurozone will contribute loan based on the GDP and population size (Lynn 71). However, all the 16 countries will contribute the loan once Greek’s government fails to access funds from international financial markets like IMF (Lynn 71).

According to EU and European Commission, based on the GDP and population size Germany will contribute the highest amount followed by France (Lynn 73). However, it is not clear how much each country will contribute but according to other sources (particularly, European Commission officials), it is estimated that each countries will contribute about € 20 billion (Telegraph Media Group Limited).

Conclusion

According to the World Trade Organization and World Bank, Greece has been an economical powerhouse for many years. However, for the last few years Greece’s economical status has been deteriorating every year and today the country is facing a major economical crisis.

Recent research on economical development reveals that Greece has had a gradual economical growth over the years, which can be attributed to development in shipping industry and agriculture. In the past few decades, it has also been reported that Greece experienced economical hardships especially towards the end of the 19^th century. Today, Greek’s economical crisis is one of the biggest problems Eurozone is facing.

According to Eurostat, 2009 is recorded as the worst financial year for Greece. It is said that in the year 2009 alone, Greece faced major economical hurdles resulting to highest deficit ever. Year 2009 marked the beginning of major economical crisis in Greece. On the other hand, Greek’s government and other European Countries are committed towards restoring economical stability in Greece.

To shows its commitment, Greek’s administration has started reducing spending and it has also began implementing tough economical measures which are aimed at reducing the current budget deficit. With the help of all Eurozone countries, there is hope that the current economical crisis in Greece will eventually be eradicated.

Works Cited

Belkin, Paul. Greece’s Debt Crisis: Overview, Policy Responses, and Implications. 2011. Web. <https://fas.org/sgp/crs/row/R41167.pdf>

Charter, David. Storm Over Bailout of Greece, EU’s Most Ailing Economy. Time Online: Brussels, 2010.

Lynn, Matthew. Bust: Greece, the Euro and the Sovereign Debt Crisis. New Jersey: Bloomberg press. 2011.

Petrakis, Panagiotis. The Greek Economy and The Crisis: Challenges and Responses. Indianapolis: Springer Inc, 2011.

Telegraph Media Group Limited. Eurozone Bail-out ‘Not Big Enough’ as Greek Debt Worries Grow. 2012. Web.

Introduction

Just as the world was gradually recovering from financial recession, experienced between 2008 and 2009, the world economy is once more in the verge of meltdown. With numerous European countries blaming Greece for failing to repay its debt, European countries are currently suffering from one of the greatest debt crisis in the history of the universe.

The crisis has plunge global financial market into a big turmoil with developed and developing countries suffering in almost equal measures (Reinhart and Rogoff 1676). Today, growth panorama in developed states has gone down to merely 1.5% while it is estimated that global growth will slow down by approximately one percent point.

In other words, the current problems affecting euro zone are not only affecting the European states but are also affecting other countries worldwide. This paper will look at the effects of the euro zone problems on Greece and the United States. In addition, it will focus on some of the laws that have been implemented to deal with the crisis and the changing environment across the globe due to the crisis.

Current problems of the Euro zone

Sovereign debt crises normally occur due to two reasons. One of the reasons is a lack of sufficient liquid assets to offset liabilities resulting from cash flow problems. The other reason is debt overhang, which occurs when the value of a nation’s assets is inadequate to meet its liabilities. While most of the sovereign debt crisis occur in the form of liquidity problem, the current crisis affecting euro zone comprise of the two forms.

For example, Greece is in debt to the extent that with its current debt burdens and interest rates, it is hard for it to offset its current debts sustainably. Greek insolvency has led to the crisis spreading to other euro partners such as Italy and Spain (Reinhart and Rogoff 1676-1681). On 27 October 2011, European leaders came up with European Financial Stability (EFSF) in a bid to address the crisis.

However, EFSF has not helped in addressing the crisis affecting countries such as Italy and Spain, which jointly have a debt of approximately two and a half trillion pounds. There is fear that if no proper measures are taken, it will be hard for the highly indebted euro zone states to borrow to repay their current debt affordably.

Effects of the Euro zone problems on Greece

Greece is blamed for the current crisis locking euro zone. Other countries are accusing Greece of conspiring to default on its debts. One of the major effects the current crisis has on Greece is slowed economic growth. Already individuals who invested in Greece bonds are taking a haircut on their debt. Some fear that the value of their debt may depreciate in future.

Hence, to avoid losing everything, they are opting to take half the value of their initial investment. In a way, this has made it hard for Greece to experience any progress in economic growth as investors are shying away from the country (Featherstone 193-201). Furthermore, the problems led to numerous riots and demonstrations in some Greek cities.

Failure by the government to address the problem made most of the Greeks demand for resignation of their prime minister. The problem led to political fall out in Greece forcing its prime minister to resign. Currently, the country has appointed a ‘technocratic’ prime minister whom it hopes will help Greece restore sanity in its financial deficits (Featherstone 203).

Effects of the euro zone problems on the United States

Little attention has been paid to the effects of current euro zone crisis on trade. Developed and developing countries are experiencing the effects of the euro zone crisis with respect to exports. For instance, since the crisis started, export companies in the United States have lost most of the European market. The crisis led to undervaluation of the euro currency compared to the dollar.

Consequently, it has led to products manufactured in European countries going to a lower cost compared to those manufactured in the United States (Reinhart and Rogoff 1682-1687). This has adversely affected companies in the United States since European industries have continued occupying their market in the region. Since 2010, there has been a shift from euro-denominated financial assets to dollar-denominated.

Moreover, the euro exchange rate to the dollar has declined by twelve percent. This has led to an increase in export competitive for European countries. In 2000, the European Union and the U.S. were at par with respect to exports, while by 2010, exports from euro member states were higher by 50% (Reinhart and Rogoff 1688).

On the other hand, the United Sates has benefited from euro zone crisis. Continued undervaluation of the euro currency has led to investors opting to use the U.S. dollar as the reserve currency. Currently, French and German banks are exposed to more than $900 billion in the euro zone countries’ debt.

Euro zone crisis slows the process of worldwide currency diversification away from dollar (Reinhart and Rogoff 1689). In return, it has helped the United States service its debts from earnings acquired from overseas lending.

Changing conditions

In dealing with the current fiscal challenges, euro zone countries have imposed numerous financial austerities on periphery countries as the condition for assistance. However, this has not helped in dealing with short-term problems. Rather than mitigating the financial problems, the austerities have ended up intensifying the problem.

The condition has led to countries like Greece, Italy, and Spain bearing the burden of dealing with the crisis leaving countries like Germany and France enjoying a free ride in the problem (Featherstone 204). This scenario is evidenced by pressure imposed on Greece and Italy to establish a regime capable of solving the crisis.

As the crisis continue to be a challenge in the euro zone, member states have started seeing the need for taking collective responsibility in solving the problem. States are now accepting to share the cost in dealing with the crisis.

Imposing fiscal austerity on periphery countries has proved unproductive in addressing short-term challenges in the region. To achieve a long-term solution to the crisis, core countries have accepted to finance some of the debt incurred by Greece (Featherstone 207). Furthermore, the states have agreed to finance banks in the country.

Policies for dealing with sovereign debt crisis

Sovereign debt crises are common in emerging market economies. In 2002, the international monetary fund (IMF) proposed the establishment of a Sovereign Debt Restructuring Mechanism (SDRM) to facilitate in addressing the problem of sovereign debt crisis. Numerous SDRMs were created using statutory powers to realize a debt restructuring entrenched within IMF program.

However, the policy did not work leading to the establishment of a policy that aims at improving market mechanism to address definite facets of the crisis resolution course. This approach is referred to as market-based approach (Reinhart and Rogoff 1689-1693). The pursuit of this approach, however, does not exclude IMF from the process of resolving sovereign debt crisis.

In fact, since the beginning of Latin American debt crisis in 1980s, actions, and policies from official sectors have significantly influenced sovereign debtors’ incentives during debt restructuring. One fundamental way in which IMF controls debt-streamlining process is by its policy dubbed lending-into-arrears. As a way of mitigating sovereign debt crisis, the policy prohibits lending to states that had failed to service their past debts.

Policies developed to address euro zone problem

As a way of dealing with the current sovereign debt crisis in Europe, member states have come up with a bailout policy dubbed European Financial Stability Facility (EFSF). The policy aims at addressing the solvency crisis affecting Greece and the liquidity crisis affecting other heavily indebted euro zone countries.

Some of the features in the policy include a deliberate write down of all Greek debts in custody of the private institutions. The policy aims at averting possibility of a default, which would have adverse effects on the zone’s sensitive financial market (Featherstone 208-215). The policy paves room for additional financial assistance to Greece on condition that its government implements financial austerity measures.

There are other two policies aimed at expanding the size of the EFSF to about one trillion pound, by using existing funds contributed by richer euro zone countries. The policies aim at establishing a buffer to cater for any contingencies, should the bankruptcy affect other countries in the euro zone.

On 9 December 2011, EU leaders agreed to contribute up to two hundred billion pounds to be used by IMF in assisting the indebted euro zone countries.

Affected laws

Since 2008, the euro zone has suffered from immense fiscal crisis. The constant fiscal crisis has tested the constitutional basis under which the euro zone was founded in varied ways. In an attempt to rescue the situation, member states have adopted various measures that have resulted in unexpected outcomes.

For instance, in trying to solve the fiscal crisis, European Central Bank (ECB) has assumed responsibilities and used powers that are beyond what Maastricht treaty allowed it. ECB has violated the guidelines stipulated under the treaty by engaging in issues that involve political value judgment rather than expert knowledge (Reinhart and Rogoff 1695).

Moreover, on 12 February 2012, Greece altered its austerity laws to allow for further assistance from the European Union, International Monetary Fund, and European Central Bank. Those opposed to the amendment were barred from their parties.

Implemented laws

To ensure that other states do not fall victims of the sovereign debt crisis, countries under the euro zone have embarked on altering their existing fiscal control mechanisms. They do this by amending their national constitutions using German constitutional as their template.

For instance, they have come up with a law that requires all European banks to have 9% capitalization to cushion them from financial hardships, which may arise due to Greek default (Reinhart and Rogoff 1698). Since Greece is the country that has seriously suffered insolvency, most of the implemented laws come from the country.

The country has severally altered its austerity policies to help it gain financial assistance from other euro zone states. On 9 March 2012, Greek government voted for revival of a collective action clause, which led to private holders of government bonds agreeing to support a debt restructuring deal (Featherstone 216-217).

As a way of averting insolvency, Italy has implemented laws aimed at freezing public institutions salaries up to 2014. Besides, it has come up with strong measures to curb tax evasion and increased the retirement age to sixty-seven years.

Changing environment

The current sovereign debt crisis in the euro zone has led to the political impasse in most of the member states. The effort by wealthier countries to rescue those in debt has led to taxpayers complaining. Consequently, leaders in the euro zone have organized numerous meetings to look for the appropriate measures to take. Most of the meetings have not born fruits with leaders disagreeing on whether to allow Greece exit from euro zone.

In addition, the crisis is affecting the voting process in European countries (Reinhart and Rogoff 1701-1703). For instance, French opted to vote a revolutionary leader in the hope that he will help the country in solving the financial crisis facing their country. Besides, the Italians called for Berlusconi to step aside to pave the way for leaders, who are capable of rescuing the country from financial hardships.

Sovereign debt crisis in the euro zone has led to western states reviewing their lending and borrowing modes. For instance, Americans are pressuring their government to come up with appropriate measures to assist the country offset its current debt.

The crisis has led to the issue of debts being at the centre stage in American politics. Americans are eager to know how the current presidential hopefuls will help the country repay its debt (Reinhart and Rogoff 1705-1706).

Conclusion

Sovereign debt crises facing euro zone are making it hard for countries to recover from financial recession, encountered in 2008-2009. The crisis has triggered turmoil in global financial market leading economic growth rate going down. One of the countries that are experiencing the weight of the crisis is Greece. Investors have avoided investing in Greece since the country is experiencing severe insolvency.

The crisis has also affected the United States, which has experienced appreciable reduction in volume of its global exports. To achieve short-term solutions, states in the euro zone have imposed fiscal austerity on the affected countries.

Some states have even gone to the extent of changing their laws to protect them from falling victims of the crisis. The crisis presents a wake up call to leaders across the globe to identify the appropriate measures of dealing with international lending and borrowing.

Works Cited

Featherstone, Kevin. “The JCMS Annual Lecture: The Greek Sovereign Debt Crisis And EMU: A Failing State in a Skewed Regime.” JCMS: Journal of Common Market Studies 49.2 (2011): 193-217. Print.

Reinhart, Carmen, and Kenneth Rogoff. “From Financial Crash to Debt Crisis.” American Economic Review 101.64 (2011): 1676-1706. Print.