Public Policy and Foreign Policy in the European Union in Relation to the Euro Crisis (PDF)

Essay from the year 2018 in the subject Economics - Foreign Trade Theory, Trade Policy, grade: 1.5, , language: English, abstract: From a retrospective perspective, the Eurozone's performance within the first decade exhibited outstanding success. One of the key indicators of its success was the attainment of European Central Bank's policy objectives. Of these policy objectives was reducing and stabilizing inflation. However, the end of the Great Recession of 2008 that led to global financial crisis seems to have ignited the Euro crisis in Europe. This was the case because European banks exhibited faults in the banking system, which were responsible for the global financial crisis. During the pre- euro crisis period, banks in the Eurozone carried out extensive borrowing based on the perceived low-risk macroeconomic environment which was created by the rising asset prices Similarly, other financial institutions within the Eurozone increased their borrowing, in order to gain benefits from increased lending. Unfortunately, asset prices took a downturn, thus prompting European banks to reduce their reverage.

In turn, reveraged financial institutions, especially banks within the Eurozone attracted few investors who were willing to buy mortgage-based assets, leading to further assets prices fall. As a result, European banks within the Eurozone began experiencing solvency problems. Despite the existence of a common monetary policy within the Eurozone, regulatory responses to the increasing Euro crisis were based on national government fiscal policies. In this context, national governments were concerned on the stability of their financial systems. As a result, banks within the Eurozone introduced bank guarantees which accompanied increasing fiscal deficits; thus raising concerns over the solvency of national governments. In retrospect, the issuances of bonds in euros by countries which are members of the Eurozone seem to have driven the Euro crisis.

To the respective Eurozone members, this situation is, more or less the same as that in emerging countries which issue bonds in foreign currencies. This implies that their central banks cannot buy newly issued government debts, leaving the European Central Bank as the only financial institution that can address the euro crisis. Since the beginning of the euro crisis in 2009, malfunctioning of the single European market, primarily the liquidity problem has made it difficult to solve the problem.