Impacts of The European Economic Crisis - Essay Example

?The European Economic Crisis The European economic crisis was termed as the worst recession since 1930. The GDP in average European countries was estimated to have fallen to about 4% by 2009. Blame was placed on financial institutions such as central banks and economic centers for providing easy ways for borrowers to get money. Most of the businesses were worst hit by the crisis causing a high rate of unemployment because firms started laying off employees to curve in the investments they had for business to continue. The EU crisis was at first unpredictable in 2006 because the EU had come out strongly and recovered from the previous crisis of the Internet bubble. The performance was good in 2006 and part of 2007. The first hit of the crisis was in the summer of 2007 but the EU was confident but later in 2008 the economic crisis was felt by the EU. Because of this there was a fall in the demand for exports; most firms started experiencing high costs because of the increase in the interest rates by banking institutions. In addition, the firms had no investments or working capital (Watt, 2008). The EU economic crisis not only had an effect in Europe but was a global issue. This was quite different from previous crises. For example, the Japan was only hit by the crisis in 1990 but its effects did not flow to other countries. Several features were noted in the financial crisis, according to the Watt (2008), there is high increase in the cost of assets and increase in the cost of real estate to unsustainable extents. In other words, the real estate sectors develop bubbles as economically referred. A high rate of liquidity was also noted by EU banks, which was mainly attributed to the increase in the rate of the financial products in which the banks had invested. This led to a high increase in premium interbank loans. Furthermore, the cases of liquidity problems mostly affected the banking institutions which also led to problems in solving of their short-term debts (European Communities, 2009). As mentioned above, the EU crisis increased the rate of unemployment in most European countries. Because of this, the high rate of unemployed workers in the market will be a long term effect. The fact is that a high number of workers outside the job lose their job skills because they are not practicing. Additionally, the EU recession caused an increase in the cost of doing business, since firms do not have access to credit from financial institutions. Because of this, firms will have to cut cost of investments such as research on investments. This will have a long term effect on firms and the countries involved because there is a loss in research which would have led to inventions of new technologies. Political crises have also been reported in countries affected by financial crisis, for example Greece. There have been cases of demonstrations, rioting and other social effects on the population. This is mainly attributed to the high rate of unemployed persons, high inflation and high prices of goods. This can be a long term effect because if the case of EU financial crisis is not dealt with, political and social instability will continue (Aghion & Howitt, 2006). The rate of depression among the residents of EU is also increasing because of the high rate of unemployment. This is because the population has lost hope for future income based on the crisis which hit their countries. This is mainly attached to the results of the crisis such as the increase in the number of poor people. This would be a long term effect because it is a continuous trend. Furthermore, other long term consequences are impacts on the populations’ health due to loss of jobs and lack of insurance cover. Research done by the Red Cross in some EU countries has shown that the EU crisis has made the governments too weak to provide important services to its citizens. This is because there is a high growth in the number of citizens demanding social services from the government. The gap between the poor and the rich is also increasing because more people are falling into poverty and those already in poverty cannot access basic needs. This makes them to resort to begging and relying on charity from people having money. Psychological effects caused by too much stress have also been reported in population. This is because of the failure by the government to provide enough support to such parts of the population. The fact is that the government is trying to cut down on spending or increasing taxes to move out from the financial crisis. For example, Greece has reported as high increase in the number of suicides because such victims plunge to poverty unknowingly and they cannot manage (TR-News 2013) Solutions for the EU Economic Crisis From a study by Dulien (2007), it is clear that unemployment is one of the major impacts of the EU economic crisis. To solve the case of unemployment which has contributed to political instability, the EU should consider unemployment insurance. According to Dullien (2007), unemployment insurance has been implemented in the United States and has done well. This act can be implemented in such a way that those who had been employed before losing their jobs qualify for unemployment insurance. The process to implement this is to gather 50% of the median incomes of a country and have them paid to the unemployed. All this is a collection from both employees and employers to a certain extent. The study also mentioned the loss of hope by firms and cuts on their investments due to loss of credit from financial institutions. The EU can solve this case by encouraging investors to invest in EU countries, which can be done by the removal of barriers for investments. High investments will increase competitions, increase technological advancement and increase the number of jobs in the market, which would then solve the case of unemployment, loss of skills by unemployed persons and increase in technology. Additionally, research and increase in development of industries is promoted by removal of obstacles to investment in the EU (The Guardian, 2012). Additionally, EU member states should spend more on the energy sector for provision of efficient energy. This will meet the long-term demand required by firms for production in future. References Aghion, P. and Howitt, P. (2006). Joseph Schumpeter Lecture on Appropriate Growth Policy: A Unifying Framework. Journal of the European Economic Association, Vol. 4. Pp. 269-274. Dullien, S. (2007). Improving Economic Stability: What the Euro Area can learn from the United States’ Unemployment Insurance. Working Paper Stiftung Wissenschaft and Politik FG. European Economy. (2009). Economic Crisis in Europe: Causes, Consequences and Responses. Luxembourg: Office for Official Publications of the European Communities. RT-News. (2013). EU Economic Crisis Causing Massive Rise in Poverty-Red Cross. Retrieved on November 18, 2013 from: Steinmeier, F. W. (2012). A Solution To The Eurozone Crisis: It's The Real Economy, Stupid. The Guardian. Retrieved on November 18, 2013 from: . Watt, A. (2008). The Economic and Financial Crisis in Europe: Addressing the Causes and the Repercussions. Brussels: ETUI-REHS. Read More