What caused the Euro crises of 2010 - Essay Example

Causes of the Euro Crises Details: al Affiliation: Causes of the Euro Crises of 2010While the adverse effects of the European debt crisis seem to have now been contained with a number of countries, beginning with Greece, being forced to implement harsh austerity measures in an effort to arrest a crisis that had obviously been long in the making, the shock waves to the entire global markets remains, with calls to restructure the union’s monetary system giving an indication of missing vital facets.

To be sure, the crisis was but self-inflicted, with deep roots in the systemic policy failures in the way the union’s monetary mechanism was designed, created and executed by its single actors, way off the requisite fiscal discipline (Shambaugh 2012). To reiterate, the euro crisis was but a function of lack of a common regulatory system to moderate free-riding and/or inject firepower to member states [economies] faced with insolvency risks, and that other factors such as the globalization of finance as well as the global recession that followed the 2007-2009 global financial crisis only added fodder to a system precariously on the edge.

The Eurozone as originally structured was more of a gentleman’s agreement requiring member states to follow a similar fiscal path, yet with much weird freedom to follow own fiscal policies that includes masking of internal monetary undertakings. This feature brought on board fiscally free riding peripheral economies as represented by Greece economic dynamics; pursuing parallel fiscal policies in total disregard of the Maastricht treaty, under which member nations had pledged to limit their debt spending (Cameron 2012; European Commission 2008).

Though Greece became the pillar of focus in a crisis that has proved counterproductive to a number of the austerity measures implemented, the pursuit of wealth in non-approved mechanisms were widespread across Europe, with quite a number of states securing future cash flows [via sovereign rights]; in effect, providing governments with a vehicle to raise future revenues that kept up with the debt targets, but in contravention to the long regarded conventional best practices and internationally agreed standards:“In “Boomerang” Mr.

Lewis captures the utter folly and madness that spread across both sides of the Atlantic during the last decade, as individuals, institutions and entire nations mindlessly embraced instant gratification over long-term planning, the too good to be true over common sense” (Kakutani 2011).Like the bursting of the US housing bubble that ignited a second global financial crisis in less than a century, such wouldn’t have come early enough in the Eurozone; and it came to pass in Greece, Spain, and Ireland among other European nations.

With the discretion over monetary undertakings, sovereign states actually concealed their deficit and debt levels through inconsistent off-balance-sheet transactions, thus, sending the wrong signals to the investors about the safety of sovereign debt in the entire Eurozone (Arestis and ‎ Sawyer 2012). Indeed, banks held large amounts of securities, those from weaker economies such as Greece included (Lewis 2011; Shambaugh 2012). As investors would soon realize, as Greece reached out for donor funding, the cat was already out of the bag, bigger and riskier to touch than hitherto thought of.

The loss of investor-confidence, which, as matter of fact was not a cause per se, would only take down already exposed half-truths that had been long inexistent. The Eurozone monetary system, as designed, was inherently unstable and structurally fragile. Unlike the US Federal Reserve that can respond in real time, the European Central Bank had a more or less of an advisory role to the union; yet almost all member states had adopted the euro as their currency, which by and large limited their monetary choices in away with regards to printing hard cash to repay creditors, if need so arises (Chinn and Frieden 2012).

The very rigidity prevented the ECB from acting as the lender of the last resort to contain the crisis in its formative stages, instead giving it the lee-way to infect the entire financial system of the union. Quite naturally, money always runs after profit. While it would be hard to rule out the effects of global finances looking to reap out of a booming Europe, the structural anomalies of the Eurozone giving member states easy access to the much needed credit for high risk lending lie squarely at the heart of the crises.

ReferencesArestis, P. and ‎ Sawyer, M. (2012) The Euro crisis, Basingstoke: Palgrave MacMillan.Cameron, D. (2012) Stumbling towards fiscal union: The causes and consequences of the Eurozone crisis, Unpublished manuscript, New Haven: Yale University.Chinn, M. D. and Frieden, J. A. (2012) The Eurozone in Crisis: Origins and Prospects [online], available: https://www.lafollette.wisc.edu/publications/workingpapers/chinn2012-001.pdfEuropean Commission. (2008) ‘Economic crisis in Europe: Causes, consequences and responses’, European Economy 7, Brussels; European Commission.

Kakutani, M. (2011-09-26) “Touring the ruins of the old economy”, New York Times [online], available: http://www.nytimes.com/2011/09/27/books/boomerang-by-michael-lewis-review.html?_r=0Lewis, Michael (2011). Boomerang – Travels in the New Third World. New York: Norton.Shambaugh, J. C. (2012) The Euro’s three crises [online], available: http://www.brookings.edu/~/media/Projects/BPEA/Spring%202012/2012a_Shambaugh.pdf