Running Head: EURO ZONE FINANCIAL CRISIS

Euro Zone Financial Crisis

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Running Head: EURO ZONE FINANCIAL CRISIS

The sources of the Euro zone crisis can be linked to some activities which took place

after the occurrence of global financial crisis in the year 2009. In was perceived that this came

into being due to the recklessness of the peripheral Euro zone states and their behavior of having

an expansive accumulation of the debts as well as the crippling welfare states. Basically, the

crisis emerged as a result of the instabilities of the locals and mostly the techniques the countries

in actions regarding their economies during the time of the global financial crisis.

The Portugal, for instance, had over expenditure into the projects deemed to benefit the

public's which entailed the constructions of the stadiums for the Euro 2004. In addition, the

mismanagement of the public services funds, as well as the investments, bubbles in which it led

to the rising of the public debt together with an unsustainable fiscal position. Italy and Greece are

found to have had a very high public debt even before the crisis which led to a constraint in their

economy. This saw due to the corrupt politicians who embezzled the public funds since they

worked so much to fulfill their selfish desires of leading for many years. They did not care to

improve the economy of the nation. These politicians used expensive pulpits so as to see that

they are not removed from their seats. They also corrupted the members of the public to vote for

them as well as broadening their state of offerings to the electoral groups to help them win the

elections (Ces international conference on the European debt crisis & Ari 2014).

Furthermore, the introduction of the Euro led to the financial crisis since having a single

currency for the euro zone states lead to it becoming cheaper especially for the external

economies to have the ability to borrow the funds from the international markets. This is

indubitably induced the large current accounts deficits. Despite the point of having the single

currency was to ease the movement of the goods in and out of the country, it negatively impacted
Running Head: EURO ZONE FINANCIAL CRISIS

the economy since some individuals took advantage to borrow international loans which

jeopardized the economy of the Euro Zone.

The Greece being part of Euro zone was affected by the crisis. The Gross Domestic

Product of Greece began to decline as from the year 2011. This was seen to have dropped at

approximately 6.9 percent despite the adjustments which were carried out industrially which

sought to ensure that the output was increased. The output in the year 2011 was found to be 28.4

percent which was lower to the output of the year 2005. This further led to inflation which

indubitably worsened the crisis as it also leads to a drop in the purchasing power. The purchasing

power declined by forty percent. Consequently, the unemployment increased up to 7.9 percent by

the year 2008 which it further deteriorated to 27.9 in the year 2013. Generally, it leads to a debt

to Gross Domestic Product ratio being increasing and accumulating at over 200 percent. This led

to a further increase in inflation from forty percent to fifty percent.

Moreover, with regards to the government bonds, the government passed a law in which

it targeted the private holders that they should voluntarily accept a swap which was proposed to

be at 53.5 percent and a nominal write-off. This was to be carried out partly with the short-term

euro notes as well as by the uses of the New Greek bonds which were perceived to have lower

interest rates with a prolonged maturity of up to eleven years to thirty years. The exchange rates

during the Euro zone crisis saw the United States Dollar increased it value making the Euros to

be less powerful (Pattanachak, 2008).

The European Central Bank and the different Euro area governments responded to the

crises by becoming very active so as to avoid the meltdown of their financial sectors by working

towards limiting the adverse effects which can be felt in such situations. The Central Bank of
Running Head: EURO ZONE FINANCIAL CRISIS

European modified the refinancing the operations which involved lowering of the policy rates

from the standing 4.25 percent down to 1 percent between the years 2008 and 2009. They as well

continue reducing this policy rates to 0.15 percent between the years 2011 to the year 2014.

Moreover, major measures were introduced into the economy which was aimed at helping the

enhancement of the credit of the country.

In this regards, the liquidity was allocated mainly by refinancing operations which aimed

at addressing the long-term operations at fixed rates and uses of full allotment basis. This implies

that the banks had the ability to have unlimited access to the central bank liquidity facing on the

adequate collateral. In an attempt to solve the crisis, the requirements with regards to collateral

were eased and moreover the maturity of the Long-Term Refinancing Operation (LTRO)s, which

initially usually takes three months to mature, was lengthened so that the operations will be

effective. This was lengthening for another three months taking six months in total to mature

(Pickford: Royal Institute of International Affairs, 2014).

Furthermore, the European Central Bank began to allow the banks and other financial

institutions to repay the funds which they had borrowed under the policy of the three years

LTRO before the date of maturity. The banks have been found to have utilized this opportunities

sensibly more so in Spain where it was believed that the reliance on the Euro system was the

main task. As a consequence of these actions, the front loaded reimbursements together with the

liquidity values in the euro area was found to have begun to fall rapidly. This action of bringing

back the economy to normal completely reabsorbed the fall and worked towards its

improvement.
Running Head: EURO ZONE FINANCIAL CRISIS

These measures regarding the LTROs depicted that the banks in operations found this

very useful in the actions related to the improvement of the monetary conditions during the crisis

period. It was witnessed that the use of the LTROs was very effective since it helped in the

provision of the liquidity crisis since the operation was found to do little to trigger the lending of

the funds to the private sectors despite chances that these sectors would have done a lot in

helping and preventing the collapse of the economy. The bank in this regards had to deposit

some of the funds to the central bank during the economic boom which proved to yield the

government bonds. In this regards, the LTROs ensured the stability of the long-term financing of

the banks with the subsidized in the banking system since it as well helped in the restoration of

the profitability (Papademos & Stark 2010).

Additionally, the financial institutions adopted a market security programs in which the

European Commercial Bank announced that the bonds ought to be held until they reach their

maturity, and thus the purchases will be treated as completely sterilized. This action is justified

with regards to severe tensions which the market segments were hampering due to the

transmissions of the central banks maturities policy. During September 2012, the central bank

embarked on modifying the policy by adding the outright monetary transactions which aimed at

taking effect on the bonds without necessarily having the program to be used. In this regards, the

central bank allowed the banks to purchase the essential amount of bonds despite being limited

which were already subjected to the European Stability Mechanisms. This was to be adopted as

long as the country signs the questions which were deemed to be in respect of the Program of the

European Stability Program. This program was effective since it aimed at safeguarding the

appropriate policies which were used in the transmissions and the singleness of the monetary

policies.
Running Head: EURO ZONE FINANCIAL CRISIS

The European Central Bank also introduced the forward guidance strategy in which

technically is a monetary tool which aims at ensuring that the interest rates are regulated so as to

stabilize it. The main reason why the European Central Bank introduced this was due to liquidity

trap in which it resulted from deflation analysis and the urge of the bank to gain traction as well

as achieve a lower bound achieved by convincing the members of the public to pursue policies

which are deemed to be inflationary when the economy has fully recovered from its recession.

The anticipated outcome of this policy was to result in a short-term rate in which it was to be

extended so as to increase the expectations which eventually will result in investment boost as

well as an increase in consumption.

The Euro Zone crisis leads to various effects on the MNCs, especially for those having

significant operations on none or all of the countries in Europe. The investments of these

companies when the crisis began, it leads to the sinking of the assets of these firms which

sparked some changes which in turn altered everything from the operations such as

manufacturing to marketing and mostly the financial operations. In the same way, the MNCs in

the other countries with the headquarters located in the Europe faced difficulties due to this

crisis. This is because the tremendous stake in which the results from the euro zone crisis lead to

a reduction in the operation of these countries since the rate of inflation rose very high making it

impossible for everybody to afford the basic needs. This implies that the available income which

was to be disposed was disposed on the food and the shelter and more importantly on clothing

(Gaskarth, 2013).

The crisis of the euro zone depicted how Europe is a very strong country since it proved

to have sophisticated customers during this time. The innovations which were being witnessed in

some parts of the MNCs declined from the emergence of this crisis. This depicted that the
Running Head: EURO ZONE FINANCIAL CRISIS

European countries had very strong manpower that were very innovative. The MNCs in the US

having its roots in the Europe was also affected negatively due to this crisis as it failed to get the

necessary funds for their operations (Hamilton & Webster 2015).

Consequently, the euro zone crisis and the MNCs outside the euro zone depicted

difficulty also in their operations since the MNCs in the euro zone was conducting business

together by supplying them with materials which were being paid after a later date. In this

regards, the crisis implied that the companies become less liquid and thus was not able to meet

their short-term obligations. In this scenario, the other MNCs had to as well bear with these

MNCs until the economy comes back to normal and most importantly stabilize so that the

business can go back normal.

In conclusion, it can be depicted that the euro zone crisis affected negatively the nations

beyond Europe. The operations of the companies all over the world came to a standstill since the

European zone is deemed to be a very good place when it comes to businesses and investments.

In this regards, the European Central Bank tried its best to see that the crisis is handled and

economically brought back to normal. This entailed application of some monetary and non-

monetary policies which is popularly known as the fiscal policies. The interest rates in this

regards were found to be the most important factor in regulating the economy. For instance, the

interest rates were reduced so that the money in the economic cycle would increase and enable

the residents to be able to buy their basic needs with no difficulty.

Running Head: EURO ZONE FINANCIAL CRISIS

References

CES INTERNATIONAL CONFERENCE ON THE EUROPEAN DEBT CRISIS, &

ARI, A. (2014). The European debt crisis: causes, consequences, measures and remedies.

GASKARTH, J. (2013). British foreign policy.

HAMILTON, L., & WEBSTER, P. (2015). The international business environment.

PAPADEMOS, L., & STARK, J. (2010). Enhancing monetary analysis. Frankfurt am

Main, European Central Bank.

PATTANACHAK, K. (2008). The impact of financial crises on output and exchange

rates in emerging market countries.

PICKFORD, S: Royal Institute of International Affairs. (2014). How to fix the Euro:

strengthening economic governance in Europe.