The European Union before and after the Financial Crisis of 2008
The European Union has been long considered as a unified political and economic structure that promotes the unity of the European countries and Western values. More than that, due to the open and tariff-free trade, it functions as a single financial market. In a certain way, the unity of the system contributed to the deepening of the effects of the financial crisis of 2008, though, some states were rescued from the threat of default, such as Greece, Italy, Ireland and others. The lessons learned from this crisis later contributed to more comprehensive integration and harmonization of the financial regulations and the policies. The consequences of the crisis and the way the member-states dealt with it prove that the EU is more than just a political organization, but a strong and powerful economic structure that has enough political power and will to manage the world-scale financial crisis.
The European Union before the Financial Crisis of 2008
Whereas the financial crisis of 2008 is generally related to as the global one, in the European context the experts usually refer to the Eurozone Debt Crisis. The main challenges that were faced by the EU countries were rooted in the structural deficits and expensive bailouts that resulted in the increased interest rates, which deteriorated the governmental positions (Thalassinos, Stamatopoulos, & Thalassinos, 2015). The problem originally resulted from the asset bubbles, similar to the ones in the USA. It led to the Great Recession, when the capital moved from the wealthier countries to the developing ones (Kahler & Lake, 2013). The bubble asset crash led to the massive bank losses. The investors started doubting the governmental abilities to pay the debts and administer them effectively.
There have been many causes of the crisis. However, all of them had different effects in terms of scope and outcome. Many states violated the debt to GDP ratio. However, no sanctions followed, as even France and Germany, two of the most active members of the Union, violated this rule (Bordo & James, 2014). Secondly, the countries leveraged from the euros power through the low interest rates and increased investment flow. As a result, the wages and prices raised and the export became less competitive. Eventually, the measures that followed the initial stage were not effective. The first signs of crisis emerged in Greece when it became clear that the state would most probably default on its debt. Later, the issues with sovereign debts touched Portugal, Ireland and Spain (Thalassinos, et al., 2015). The EU headed by the Germany and its counselor, Angela Merkel, struggled to support these countries through the series of bailouts that were rather expansive for the Union. Over time, they sustained the crisis though they never returned to the economic rates of 2007. Many blame the anti-crisis initiatives that were proposed by the British government as they froze the economy and prevented it from growth for a few consequent years.
The Origin of the Financial Crisis of 2008 in Europe
At the beginning of the crisis, the countries started responding in a way that differed much from the traditional approaches. For example, the policy of the budget deficit was used, that was primarily implemented during the Great Depression and which actually led to the decrease of the total demand and reduction of the economic development speed of many countries. On the contrary, the states employed a new approach that did not aim at reduction of the budget deficit. To the very least, the governments did not scrutinize the expenses due to the low tax incomes. Large financial institutions, such as the Royal Bank in the UK, or industrial companies, such as the GM and Chrysler in the USA, managed to sustain the financial crisis due to the help that was provided by the state (Grande & Kriesi, 2016). At the same time, the Central Banks of many European states started minimizing the interest rates. Some of them even broke the historical records. The Bank of England, for instance, reduced the rate to the minimum, while the last time something similar happened was in 1964 (Grande & Kriesi, 2016). Another measure referred to the issuing of the state bonds when the central banks started borrowing from their residents exchanging the money or their savings for the state obligations.
However, soon after that, the governments started introducing the new policies that were more consistent with the old approaches towards the managing of the economic affairs. In 2010, the British chose the conservators to lead the government, which eventually resulted in the adoption of the anti-crisis program for Greece. Moreover, the EU made a decision to assign financial help to Spain, Portugal, Italy and Ireland upon the condition that they would implement the measures aiming at the reduction of budget expenses (Grande & Kriesi, 2016). In 2011, all the member states of the EU signed the European Fiscal Act that stressed the importance of inadmissibility of the budget deficit, which demonstrated that the states returned to the traditional methods of dealing with the crisis that provided for the minimizing of the expenses (Grande & Kriesi, 2016). In many countries, such political steps led to the decreasing of the initiatives and programs that supported the idea of the welfare state (Billiet, Meuleman & De Witte, 2014).
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The Consequences
The financial crisis of 2008 had disastrous effect upon the world economies, as it affected even the most underdeveloped countries. Naturally, the wealthiest states were affected, too. Even in 2012, five yeas after the beginning of the financial crisis, the economic rates were worse than in 2007, which meant that the crisis was still in progress (Grande & Kriesi, 2016). The GDP in the countries measured in 2012 was smaller than in 2007. For example, in Greece it was lower by 26%, in Ireland by 12%, and in Spain by 7% (Grande & Kriesi, 2016). Such slow progression was attributed to the implementation of the above-mentioned approach towards the budget expenses. The cuttings of the expenses, in fact, slowed the economic recovery of these countries, as the reduction of the state expenses combined with the stagnation of the economy led to the low recovery pace and slow further progress (Hern?ndez &. Kriesl, 2014). The crisis left many people unemployed, which also negatively affected the economies and resulted in the emerging of the poverty-related problems. In Spain and Greece the unemployment rates raised to 26 and 28% respectively (Grande & Kriesi, 2016).
The Measures Undertaken by the EU to Help Other Countries to Recover from the Crisis
The responses of the EU demonstrated the political unity of the European states at the time of financial disaster. Many regulations were passed to normalize the markets and to stabilize the state of the economies within the union. Yet, all of them were successful mainly due to the political will to stay within the Union and to be a part of the greater financial and trade market. The EU dominating countries advanced the integration of the Union and creation of the singular legal framework for the functioning of the financial markets (Chang, 2014). The EU stressed that the financial crisis revealed an urgent need for the improved financial regulation and the supervision of the financial markets. Sine 2010, the European Commission had proposed more than 30 regulations to ensure that the participants, the products, markets, and services are regulated in the appropriate way and that all of them are effectively controlled. Apart from that, it was stressed that the crisis also pointed at the connection between the banks and sovereign debt.
Among the measures that were undertaken by the EU was the establishing of the scrutinized supervision and control. It helped to establish improved coordination of the national supervisors and the enhancing of the mechanisms of the EU that dealt wit the risks and cross-border effects. The European Supervisory Authorities were founded to lunch other institutions for the supervising purposes (European Commission, 2015). One of them was the European Banking Authority responsible primarily for the supervising and recapitalization of the banks. Another one, the European Securities and Markets Authority, was responsible for supervision of the capital markets and trade repositories. Eventually, the European Insurance and Occupational Pensions Agency dealt with the supervision in the area of insurance (European Commission, 2015). All the member states were represented in these authorities. The European Council also suggested the adoption of the single financial rulebook that would guide the states in their financial policies.
A few legal instruments were employed to deal with the crisis and to prevent it in the future. One of them, Agreement on Bank Recovery and Resolution Directive (BRRD), entitled the authorities to intervene in the financial processes of countries on the initial stages before the problems emerge. The Agreement provided for the allocation of necessary resources and their assigning to the problem banks or other financial institutions. The Agreement on the recast Directive on Deposit Guarantee Scheme (DGS) ensured that the bank deposits in all member states would be guaranteed to €100 000 per depositor per bank in case of its failure (European Commission, 2015). Such change was aimed at reduction of time periods needed for the pay-outs with repayment deadlines, as well as at creation of strengthened financing procedures. This regulation also improved the depositor information, which ensured that the depositors would be informed of the issues related to the protection of the deposits as per the Deposit Guarantee Scheme (European Commission, 2015). The Agreement on the Single Resolution Mechanism (SRM) is another integrating mechanism that would be used to assist the banks at times of failure. In case of the cross-border issues, it is considered as a more efficient instrument than the network of the national authorities, the actions and decisions of which are not coordinated, integrated and consistent.
All in all, as could be inferred from the above-mentioned statements, the financial crisis of 2008 actually contributed to the improved and enhanced integration of the European markets and creation of the legal framework for better regulation and harmonization of their performance. Before the crisis, there were many national decision makers and, at times of emergencies, they tended to pass the decisions that actually made the situation worse. The financial crisis contributed greatly to the strengthening of the political institutions and establishing of the new authorities that supervised the activities of all the members of the financial markets. One of the consequences of the crisis was the interventions of the EU political institutions into the financial processes of member countries with the aim of advancing the interests of the Commonwealth. Yet, on the other hand, the economic crisis actually demonstrated that the European Union is a rather strong political and economic organization with its wealthier member states capable of rescuing the less developed countries at times of crisis and failures. Consequently, it proves the idea of the union and its effectiveness regardless of all the comments of the skeptics.
Conclusion
In conclusion, the financial crisis emerged as a result of the asset bubble shrinking in the USA. In Europe, however, it was generally referred to as the debt crisis, since it mainly involved the banking sector. Many countries were shattered by the crisis as it lead to the irreversible changes in the economy, as well as to the high unemployment rates. Many countries found themselves on the edge of default. The EU response to the crisis could be generally divided into two phrases. At first, the countries adopted the approach that was aimed at maintaining the status quo. The next stage was marked with the election of the new conservative coalition to the British Parliament. which resulted in the adoption of ant-crisis measures and introduction of the policies of inadmissibility of the budget deficits. The European institutions passed many regulations that actually contributed to the harmonization of the laws and by-laws within the Union and facilitated faster recovery from the crisis. Apart from that, the crisis proved the ability of the EU member states to rescue the governments at times of failure. Moreover, it was used as the opportunity to integrate the European national financial markets by creating the common institutes, which task was to supervise the activities and decisions of the actors and control them with a possibility to intervene in their operations, in case there would be reasons for such an intervention. Based on that, it can be inferred that the EU is effective in managing the challenges, such as the world financial crisis. However, even after taking serious measure to curb the problem, some of the consequences of the crisis are still visible on the European continent, especially in relation to the employment situation.
