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The latest global financial crisis has been the biggest in recent times and has affected the outlook of many developed and developing economies of the world. The main victims of the crisis has been the financial giants like USA , UK and the European Union because they have been the financial hubs of the world and the economy of the countries has mostly been dependant on the credit culture ( EU business2010) . However, concrete steps have been taken to make future financial stability and bring every financial institution, market, instrument, and economy under a clear, concise and simple system of regulatory control. The emerging markets and the developing countries at first looked to be immune from the turmoil that was coming from the USA, (Jeff Corbett 2010). However, soon the countries that had adopted the export led growth strategies and liberalized their capital accounts, have found that they have been suffering from the effects of reduction of aggregate demand of the nations to which they exported.
However, if we say that the current economic instabilities have a United States origin, it would not be wrong as the original underlying assets were houses whose prices were falling, the collapse of the US mortgage market further emphasized the failure and instability of the housing sector (Jim Ottewill 2009). in US and hence US being the Super power has affected the whole world. Indeed some major reforms can be helpful in the process of reconciliation as new regulations have been in place that are comprehensive, covering all activities, instruments, markets, and institutions that includes off balance sheet items, hedge funds, and off shore centers and tax heavens.
However having much said about the effects of the crisis on the US, a modern European response must take factors into consideration in efforts to improve the confidence in the banking sector (Guardian 2010). A step taken by the UK government by injecting large amounts into the money market is very unlikely to bring an end to the current financial crisis as it will not address the root of the problem. Europe has a traditionally an open response to inward investment and this is a process that will continue. However, there is a predictable framework that is based on the principle of free movement of capital and the European Union must reinforce its commitment to a stability oriented economic policies and necessary structural reforms (BBC 2010). This is necessary not only to meet the medium-term economic objectives but also to underpin the economic confidence amid the effects of the current financial turmoil. The most effective way for the EU for future sustainability is to persist with the long term and predictable policies of the structural reform and improvement in the quality of public finances and the reduction in public debt to more sustainable levels.
IMPACTS OF THE GLOBAL FINANCIAL CRISIS ON THE EUROPEAN COUNTRIES
The main victims in the European countries have been the banks and the financial institutions. The effects include the major write downs and losses of holdings of the US sub-prime securitizations and other related sub-prime assets. Losses on assets arising from the down turn in the property values in their own particular countries, and funding difficulties as a result of freezing of global interbank money markets that have been resulting in significant liquidity problems. Many institutions have been a victim of funding mismatches that simply means that they have to refinance major parts of their accounts every quarter. Banks have shown reluctances in lending money and as a result large funding mismatch can find it difficult to attract funding.
The UK has taken considerable steps in the solving of the financial turmoil by taking immediate steps in saving the national institutions from collapsing. The directive aims at improving and managing large exposures of the bank, and this has been done by setting lending limits for the banks for exposure against any single party. The banks have restricted themselves from lending or placing money with other financial institutions and banks in the inter-banking market beyond a particular limit. The government of UK has also undertaken measures for the regulation and supervision of the credit rating agencies. There were various weaknesses that were highlighted by the financial crisis in the FSAs supervision of the regulated organizations and the FSA has been working to strengthen and enhance its process of supervision of the banks. Other steps taken by the UK government included government guarantee facility established for an interim period that provided guarantee for long term and short term debt issuance for assisting those financial institutions that raised tier1 capital by the amount and the form that is acceptable to the government for the re financing of their wholesale funding obligations.
The global financial crisis had its effects on the European trade as the statistics above clearly shows that.
Fig1: Stats for the Exports of Goods and Services (EU and UK)
This has been critical in laying effects to the trade deficit.
Within Europe, the Netherlands is one of the most open economies. The export of the goods and services amounts to about 80% of the GDP, which is almost twice the European average. The financial crisis also affected the employment rate in the Netherlands, as it reached its lowest in Europe at around 3%. However, it did not lead to excessive wage increases as the labor supply showed a high degree of flexibility that was brought about by the large number of part time and temporary workers. Another major consequence was that over the past years companies have had difficulties attracting qualified personnel due to the tight labor market. At the start of the crisis the gross government debt level stood around 45% of the GDP that was considerably below the standard European level of 59%. The negative effects of the financial crisis became more apparent in the year 2008 and the economic growth came to the grinding halt in the second quarter.
Fig 2: Long Term Effects of the Financial Crisis in European Union
The stats show the long term effects of the financial crisis in the European Union with respect to the GDP. The period ranging from 2008 to 2009 has shown major decline in the levels of GDP which will take further 5-6 years to stabilize.
In France under the global financial crisis more and more citizens are clinging to secure loans and debts to help them with the debts and finances. More and more financial institutions are also closing down due to the effects because they cannot find money to pay these transactions to overcome the crisis. The foreign lending institutions in France are also shutting down and transferring their services to other countries that are at least better off then their economies.
The economic and financial pains tend to lead countries to pull back from globalization and openness, but itâ€™s clearly shown from the past that international economic integration generally expands economic opportunities and is good for the society. As part of the consequences the income inequalities in countries like UK and the USA which are already high compared to that of other advanced countries is likely to get worse. As a matter of fact for this reason it is important to ramp up social programs to provide assistant to the innocent victims of the crisis and to repair the damage done to pensions. However, the European economy in addition to the world economy goes through a slow down or recession, there will be a negative impact on employment growth, redistribution and inequality reduction.
There are some major steps and processes that have been in pipeline for implementation, and these measures that the EU members have announced includes continued support for the financial system from the European Central banks and other banks, rapid and consistent implementation on the bank rescue plan that has been established by the member states, and decisive members that are designed to contain the crisis from spreading to all of the member states. As the financial system is stabilized the next step would be to restructure the banking sector and to return banks to the private sector.
The global financial crisis that started from the mortgages of homes in the US has triggered the whole world including developed as well as developing nations. The European Union and the UK have also been victims of the crisis in shape of financial instability and unemployment at its peak. Production in large companies has also been adversely affected leading to a decline in output at considerable levels as well as resulting in layoffs, mergers and acquisitions and re-engineering of the companies. Globally the companies and individuals have an ever increasing demand for capital for both personal as well as corporate investments and the banks have been very conservative in their requirements. The banks and other financial institutions in major economies like US, UK and Euro zone have been through a huge period of in appropriate lending, and the relaxation of lending terms for mortgages was as a result of the boom in the housing sector.
The effects were even worse by the rising global energy and the commodity prices that pushed up inflation. The emerging and developing countries have particularly experienced strong rises in prices that also reflected the high weight of food in their consumption baskets. The projections made by the IMF show that by the end of 2008 and the early 2009 most developed economies were on the verge of recession if not in a recession. However, the emerging economies have to a great extent remained resilient to the global financial turmoil. In the Euro zone especially there has been a reduced demand for imports and this has been the likely cause of increase in the market prices of products that were imported in Europe from abroad. The British government has set aside Â£500 billion for huge injections of liquidity into the banking system that has guaranteed lending between the banks and also paved way for incentives to kick start investments and for the revival of the mortgaging. Other EU countries like Germany, France, Italy and Spain have put aside US$ 2.3 trillion in guarantees and other measures in order to save the banking system. The trade and finance has been the main victims of the financial crisis in US as well as Europe as there is a two way relationship between trade and financial services. A well developed financial system boosts trade through the provision of financing and reducing the risk factor that is involved considerably. Trade also creates demand for other financial services and therefore promotes the development of financial systems, as this is a fact that world leading financial markets are the leading trading places for goods and services. There are four main ways in which the trade is supported by the financial sector i.e. providing working capital, ensuring receipt of payments in a least cost and risk manner, providing valuable information for investors and traders and also provides insurance against certain risks. The crisis in Europe has affected trade as the credit shortages reduced imports and may under circumstances also render trade financing become more and more difficult. The financial crisis also possesses risk on trade payments thus reduced demands of imports by EU that is one of the major trading zones in the world. However, there is a need for risk management and contingency plans to get out of the recession and the financial crisis, and the high rate of growth in employment that has been caused by the crisis situation worsening in the Euro zone.