The Eurocrisis - Financial Crisis

Question 1

Financial Crisis

Answer 1

2007-2008

Question 2

Wall Street Crash

Answer 2

1929 - Takes measures to regulate the banking sector

1933 - Glass-Steagall Act - Strict separation of commercial and investment banking

1939 - Clinton declares act no longer appropriate

Consequences - No clear rules, competition and distinction between commercial and investment banks, leads to risky investments

Question 3

What happened?

Answer 3

No rules - People can get money too easy - Housing Bubble (low interest rates so demand > supply) - Increased interest rate - Bubble bursts (2008)

Question 4

Consequences

Answer 4

Financial market:

• Trust crisis amongst banks
• Banks collapse

Real economy:

• Less credits offered by banks
• Investors do not invest

Question 5

Eurocrisis - Failures

Answer 5

• One size does not fit all
• Compliance with EU budget discipline
• MU but no economic MU

Question 6

One size does not fit all

Answer 6

Advantages common currency:
- No exchange rate risk - More trade

Disadvantages:

• No own monetary policy
• No devaluation possible

Question 7

Compliance with budget discipline

Answer 7

• Maastricht convergence criteria (inflation no higher than 1,5%, debt no more than 60% GDP) but no compliance
• No adapted program

Question 8

What is the Eurocrisis?

Answer 8

Combination of poor government budgets and financial crisis.

Trust crisis between banks, governments and investors caused by the incompetence the EMU and constructions failures of the Euro.

Question 9

3 spirals

Answer 9

1. Banks and government - Banks in debts - Saved by government - Government in debt
2. Government and investors - Investors fear bankruptcy - Negative rating - Ask higher interest - High government debt
3. Investors displacement - From countries with high risk to countries with low risk

Question 10

Solutions

Answer 10

Short-term:

• Financial support for countries in need (EFSM, EFSF)
• ECB (LTRO, refinancing, + OMT, rebuying debt)

Long-term:
- Fiscal Union, Banking Union and Political Union or Exit

Question 11

Fiscal Union

Answer 11

• One central bank

- One central government that has budgetary control

Question 12

Banking Union

Answer 12

Too big to fail - Less risk

Negative spiral between banks and governments has been broken

Question 13

Political Union

Answer 13

Democratic basis for fiscal union (5 presidents’ Report)