current crisis of eu and solution

7/28/2019 Current Crisis of EU and Solution

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ASSIGNMENT

ON

International Trade & Finance

TOPIC :

The reason behind the current crisis of EU and

suggest some solution to overcome theseproblem

SUBMITTED TO

Mr. Tanvir M H Arif

Asst. Professor,

Dept. of Finance & Marketing

University of Chittagong

SUBMITTED BY Md. Rokonuggaman Khan

Dept. MBA(1)

ID – 120204044

Date of submission – 28\01\2013



BGC TRUST UNIVERSITY BANGLADESHIntroduction:The European union or EU known as formally as the European Economic and monetary

union. EU was established after 2nd world war with their neighbor country of Europe.

Initially six nation involve in establish EU. They are Belgium, France, Germany, Italy,

Luxembourg and Netherlands. The main objective of established EU is to create a

political and economic community throughout Europe. At present there are 27 member

countries include in EU. the EU is run by three bodies, the EU council, representing

national government, the parliament (elected by the people) and the European

commission.

Crisis:Debt crisis is the main crisis of EU. Five of the region countries are responsible for this

crisis. Greece, Portugal, Ireland, Italy and Spain failed to generate enough economic to

make their ability to pay back bondholders the guarantee. Although these five were seen

as being the countries in immediate danger of a possible default, the crisis across the

borders of the EU. Now the crisis is not only crisis of the EU but also effected allover the

world. The world face the most serious financial crisis at least the 1930s, if not ever, in

October 2011.

Reason of EU crisis:European Sovereign debt crisis is the result of three separate but interrelated plots.

• Crushing levels of government debt is some countries.

• Problems in the banking sector.

• The slow growth it Europe.

The financial crisis of EU is began since the US financial crisis of 2008-2009, which has

exposed the unsustainable fiscal policies of countries in Europe and around the global.

The crisis firstly affected the Greece because they failed to undertake fiscal reform. At

the time Greece debt were so large that they actually exceed the size of the nation’s entire

economy.



In 2003 Germany wants to produce everything in their own country. So they collect their

fund issued in foreign currencies and French bank purchase a lot of Greece bonds. In this

time banking regulation allow financial institution to count risk free investment as a part

of their required liquidity. So the bank purchase more risks free debt which create

liquidity problem in the Europe. On the other hand by late 2009 Greece unable to pay the

interest on the debt.

In the 3rd the show growth rate of Europe. The growth rate of Europe decreases because

they more invest in real state site which did not the total economic growth. On the other

hand the total production comparatively decrease and increase production cost.

Another reason for European debt crisis is that the single currency does not fit the

different need of member countries and unsustainable economic divergence will

ultimately require that the euro be abandoned.

The fatal divergences that are most frequently cited include difference in growth rate, job

creation and unemployment rates, as well as dramatic in current account balance. All of

which way be traceable to wide deviation in unit labor cost.

Affect of crisis:

These results are summarized. Which show what percentage of the debt of each country

was issued by government? Financial institution and nonfinancial institution and what

percentage of a countries’ total debt is represented by household debt. All the number

represent a percentage of the country’s GDP. Thus in the 10 developed countries, the

total debt increased form 200% of GDP in 1995 up to 300% of GDP in 2008. Some

countries displayed even higher increases in the ratio between debt and GDP, Such as

1200% for Iceland and 900% for Ireland. In the case of the latter two countries, the debt

level proved unsustainable and pushed them into and GDP reached the highest level are

the peripheral countries of the Euro zone (Greece, Portugal, and Italy).



Solution:

Euro zone leaders’ latest plan to rescue the euro, agreed to late last month, focuses on

two crisis : the continent’s ailing bank and the sovereign-debt woes of Europe’s southern

peripheral economies.

Most economists agree that renewed economic growth is essential for saving the euro.

The problem is that the effects of measures such as creating a banking union, the

centerpiece of the recent summit’s rescue plan, may save the banking system but will do

nothing to reserve the loss of competitiveness among the region’s economies.

A higher average inflation rate in Germany can help reverse this side. But so far, the

country has opposed any policy that might stoke inflation. Two horrendous periods of

hyperinflations after the world wars still haunt German’s.

Recently the European Central bank cut its interest rate to 0.75 percent, a historic low,

amid signs of deteriorating economic activity in Europe.

Some European countries have long needed better economic accountability and more

responsible economic management. However, timing is crucial, reform on a well-

throughout timetable must be distinguished from reform done in extreme haste.

European should introduce "mini-jobs" with lower taxes.

Create special funds and tax benefits to privatize state-owned businesses.

The more reasonable solution than trying to narrow the civilization gap between the

nations of the EU

Another efficient way to strengthen the bond between EU citizens is by making the

European Union institution more democratic.

The Euro zone member agreed last month to write down half of the Greek debt owned

by the Private sector, recapitalize Europe’s bank and boost the fund created as a firewall

to protect solvent euro-zone governments.

current crisis of eu and solution

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