The Eurozone Crisis

Presentation

Eurozone crisis

Origins, predictions, realities

In 1950, an economic theory published by Robert Mundell enounced the following:

Countries have interest in the creation of a unique money if:

- They are economically integrated.

- The economic reaction because of economic shock is not too different between countries.

- When there are mechanisms able to remediate to the divergence which exist or could appears.

I. From the American subprime crisis to the Eurozone

A. A Crisis with American roots.

The subprime mortgage crisis was a crisis which started in the USA around 2007. This crisis was mainly concerning the subprime mortgage and has affected the bank and the financial system leading to an important economic crisis in the fall 2008. This crisis also become a global crisis in 2007 and led to the one in 2008 and those which followed. The Federal Reserve Bank was accused of being the cause of this crisis. Indeed, the RFB was practicing low key rate between 2003 and 2004. This policy was encouraging people to loan even at a dangerous level and even if they were low creditworthy. Then, the RFB decided to increase drastically his rates. At this time, the mortgagors didn’t have the capacity to pay back their loan and so the bank started to have a lot of lost which led to the economic crisis in USA. But what spread this crisis and transformed it in a global crisis were the Securitization, the Transmission by investment funds and finally, the indirect engagement of banks. “Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or collateralized mortgage obligation , to various investors”. The Transmission by investment funds is about the fact that certain Bank of investment had already bought securitized debt to the bank who were in trouble. Finally, the indirect engagement of banks means that the banking system was supporting credit risks, not only in funds that banks financed, but also in the funds they managed. It has caused losses in banks, explaining lower annual results. States had to help the banks, explaining the largest deficits. The various rescue plans in place and revealing ineffective have created a doubt towards banks, which made the situation getting worst. This ineffective rescue plans made by states which were trying to save these banks also made the States debt getting bigger. However, the causes of this crisis in Europe are not only because of the American subprime crisis. Indeed, the root causes are multiple and vary from one country to another: a very strong debt related to major structural problems (difficulty in raising taxes and spending to master), weak growth that affects all the old industrialized countries since the economic crisis known as the Great Recession (2008 and after), the cumulative effect caused by expectations of a continued slowdown in growth prospects; and low taking into account the widening gap

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