The European Crisis Is Over, Growth Has Resumed - Term Paper Example

Finance and Accounting Financial Analysis: "The European Crisis is over, Growth has resumed and we can now relax about the viability of the Euro Area" Discuss and evaluate this statement Contents Contents 2 Introduction 3 Financial Stability 4 European Stability Mechanism 4 European Financial Stability Facility (EFSF) 5 European Financial Stabilization Mechanism (EFSM) 5 Viability of the Euro Area 6 Europe 2020 growth strategy 7 Conclusion 8 References 9 Bibliography 10 Word Count (1582 words) Introduction The European crisis is also known as Euro crisis which has affected the countries of European Union since the beginning of the 2009. The actual financial crisis was started in the year 2007 in the USA when over optimistic banks of the united states declares the insolvent position as a result of wrong lending in the mortgage market. In the month of September 2008, the largest investment bank is USA Lehman Brothers Collapsed and the crisis started to spread to rest of the world. In this situation, to help the banks from collapsing European govt. had taken a step to rescue their banking system (Chadha,Dempstar, 2012). The European govt. lent 4.5 trillion euros which 375 of the entire European Union’s GDP and the EU also launched a recovery programe to save the employment levels, to support economic investment and to upgrade the social protection levels. Thus the EU govt. tried to prevent the bank from collapse and European savings were protected. In this way euro was able to maintain its value and the countries in the euro zone was protected from the adverse effect of recession in USA. But the effort had gone to vein as because the money by which EU were supporting the companies were borrowed and as a result since the early 2009 most of the countries started to face problems related to the repayment of debt. This had brought a new turning point in the crisis and raised the sovereign debt crisis. With the constant increment in the debt levels, market lost confidence in some countries and the market thought that it would not possible for them to repay the debt. Interest rate for the bonds of those countries became undependable and the problem mostly affected those countries which was sharing euro as their common currency. The banks started to reduce their lending in private houses and businesses and as a result in 2009 the economy of EU had suffered the worst recession. But it started to take a short recovery in 2011 but then again in 2012, it had faced a mild recession again. The recession started to affect all the countries in the euro zone and it reduced the employment level and increased the level of poverty. The another main reason for euro zone crisis was the economy in euro zone was very much dependent to each other, and as a result if one prospects then other get the benefit and if one suffers then other also suffer. Thus because of the interdependencies euro zone started to face recession. Financial Stability To overcome from the severe financial crisis and sovereign debt crisis, the EU and the members of other European countries decided to set up a mechanism to stabilize the euro currency and the economy of the European nations. They built up- European Financial Stabilization Mechanism (EFSM) and the European Financial Stability Facility (EFSF) and in the month October in 2012, EU created a stable rescue technique for the member countries which is known as the European Stability Mechanism. European Stability Mechanism The ESM is an everlasting international financial organization that helps in protecting the fiscal security of the European Union monetary union. It is an intergovernmental association under open universal law and it presently is the essential help component to euro region Part States. The ESM issues securities or other financial instruments on the budgetary markets to raise the funds to give support to the States. Not at all like the EFSF, which was based upon members of euro zone State ensures, the ESM has aggregate subscribed capital of 700 billion pounds gave by euro region Part States. 80 billion pounds of this is as paid-in capital with the remaining 620 billion pounds as callable capital. This subscribed capital gives an ability to lend the ESM of 500 billion pounds (Economic and Financial Affairs, 2013). European Financial Stability Facility (EFSF) The EFSF was made in light of the exceptional budgetary emergency that started in 2008. It was created, as a part of the broader extensive security net, to give brief soundness backing to euro-territory Part States. It is an organisation which was created under Luxembourgish law on 7 June 2010, as a component of the package of May 2010, commanded to give monetary support on an impermanent foundation and hence equipped to enter into new projects just until 30 June 2013; in spite of the fact that the EFSF will keep on servicing the existing duties from there on. The EFSF gives fiscal support to euro zone Part States, interfaced to suitable restriction. It gets financing by issuing securities or other obligation instruments on the fiscal markets sponsored by assurances of the shareholder Part States. These provide a guarantee of 780 billion pounds. Member State of EU under the EFSF fiscal aid may ask for a withdraw of the surety structure, in this way successfully asking for that its assurances are no more utilized for any future giving (Economic and Financial Affairs, 2013). European Financial Stabilization Mechanism (EFSM) It is mechanism which gives monetary support to the member of EU States in fiscal difficulties. The European Financial Stabilization Mechanism (EFSM) basically recreates for the EU 27 the fundamental mechanics of the existing Regulations of balance of payments for non-euro zone States. Under EFSM, the institution is permitted to obtain a loan of up to 60 billion pounds in monetary markets for the Union under the budget of EU with guarantee. The institution then on-lends the earnings to the beneficiary States of EU union. This specific giving game plan suggests that there is no obligation adjusting expense for the Union. All investment and credit key is reimbursed by the beneficiary Part State through the Requisition. The EU plan ensures the reimbursement of the bonds through a p.m. line in the event of default by the borrower. The EFSM has been initiated for Ireland and Portugal, for an aggregate sum up to 48.5 billion pounds (26 billion pounds for Portugal and 22.5 billion pounds for Ireland and), to be dispensed in a period of 3 years (2011 – 2013). The EFSM is an important part of the broader extensive wellbeing net. Along with the EFSM, the European Financial Stability Facility (EFSF) the funds provided by the other member of euro zone states, and financing from the International Monetary Fund (IMF) are accessible for euro region member nations. Non-euro zone countries are also qualified for support under the Regulations of balance of payments. The EFSM and the EFSF can be started after an appeal for fiscal aid has been made by the concerned member nations of EU and a macroeconomic change system, fusing strict restriction, has been concurred with the Requisition, in contact with the European Central Bank (ECB) (Economic and Financial Affairs, 2013). Viability of the Euro Area The EU had understood that to overcome from the debt crisis, Europe needs to build a stronger economic union to strengthen its existing monetary union and to make sure that public finances are sustainable. To implement this EU had taken some steps as follows- The EU brought new strict rules to limit the public debt and deficit and to make sure that countries do not spend beyond their capacity. The EU established a new fiscal treaty in which it was mentioned that yearly structural defi8cit will be no more than 0.5% of the GDP because the crisis have proved that the debt fueled economy cannot sustain in the long run. Now the European Commission will ensure that limits of debts and deficit are strictly followed and budget of one EU nation should not affect the other member states. This is the main purpose of the fiscal treaty. European Financial Supervision was set up to ensure that the banks are well capitalized and they are able to lend money in private companies and households. This has made the way for new banking union. Banking union will protect the deposit of the investors and people will not be forced to pay taxes on failure of banks (Economic and Financial Affairs, 2012). Europe 2020 growth strategy The EU will pursue the object of achieving the goal of Europe 2020 growth strategy. It will implement the structural reform to recreate the opportunities of employment in European region. It will also boost the competitiveness and productivity through in-depth researches. The Europe growth strategy of 2020 will increase the energy efficiency by 20% and transportation of EU will be enhanced. It will also provide high speed internet facility to all the Europeans wherever they lives (Chadha,Dempstar, 2012). To achieve the above mentioned targets, Europeans need to work together to provide the long lasting solution to the problem of debt crisis through the creation of sound public finance system and a solidarity mechanism for any urgent situation which is known as Fiscal Union (Chadha,Dempstar, 2012). They also need a stronger supervision of financial activities and it will be enforced by a banking union. Apart from this, to stabilize the euro currency, they need a stronger economic union to boost the growth and competitiveness in the member states (Economic and Financial Affairs, 2012). Conclusion From the above study it can be said that the European Union is people’s project and it has made to upgrade the standard of living of the residents and overall economies of the nations. It needs to overcome quickly from the sovereign debt crisis to make a more united and a perfect political union to become a strong part of the world. References Chadha, J., et al. The Euro In Danger: Reform and Reset. 2012. Economic and Financial Affairs., 2012. EU response to the crisis. [Online]. Available at: http://ec.europa.eu/economy_finance/crisis/index_en.htm. [Accessed on 4/4/2014]. Economic and Financial Affairs., 2014. Europe 2020 in a nutshell. [Online]. Available at: http://ec.europa.eu/europe2020/europe-2020-in-a-nutshell/index_en.htm. [Accessed on 4/4/2014]. Economic and Financial Affairs., 2013. Intergovernmental support mechanisms. [Online]. Available at: http://ec.europa.eu/economy_finance/assistance_eu_ms/intergovernmental_support/index_en.htm. [Accessed on 4/4/2014]. Economic and Financial Affairs., 2013. European Financial Stabilisation Mechanism (EFSM). [Online]. Available at: http://ec.europa.eu/economy_finance/eu_borrower/efsm/index_en.htm.. [Accessed on 4/4/2014]. Bibliography Gomes, S., et al. 2011. STRUCTURAL REFORMS AND MACROECONOMIC PERFORMANCE IN THE EURO AREA COUNTRIES. [Pdf]. Available at: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1323.pdf. [Accessed on 9/4/2014]. Europe.eu., No Date. The growth impact of structural reforms. [Pdf]. Available at: http://ec.europa.eu/economy_finance/publications/qr_euro_area/2013/pdf/qrea4_section_2_en.pdf. [Accessed on 9/4/2014]. Anderson, D., et al. 2013. Fiscal Consolidation in the Euro Area: How Much Can Structural Reforms Ease the Pain?. UK: International Monetary Fund. Everaert, L., 2010. Lifting Euro Area Growth: Priorities for Structural Reforms and Governance (EPub). UK: International Monetary Fund. Read More