The global economy has been in turmoil for the past few years. In addition to global uncertainty, this economic downturn has caused significant problems in the European Union. Identify the causes of the ‘global economic meltdown’ and analyse what could have been done to avoid it. In your answer consider the future consequences for the European Monetary Union.
In past several years, the global economy turmoil aroused the global uncertainly. Then, it was leading to the global economic meltdown that means the economic recession that affects a lot of countries around the world. “After the meltdown, around the world stock markets have fallen, large financial institutions have collapsed or been bought out.” Shah (2008) Therefore, this essay will first describe the main causes of the global financial crisis. It will then go on to analyze the methods to avoid it. Finally, this essay will briefly discuss the future outcome in European Union. The essay has limitations because it only covers the main causes about the crisis and the solution about European Union.
There are three main causes for the global economic crisis. Firstly, the sub-prime crisis and housing bubble are largely responsible for an economic meltdown. At first, the bank lent money to people on low credit scores so they can buy the houses. After a period of time, the bank has to resell those houses for the paupers cannot repay the loan. Then, the real estate companies cannot afford the credit because they cannot get the money from the homebuyers who have the financial problems. As a result, bank cannot ask for the money and almost every bank was in the same situation. Unfortunately, the bank was connected in the world so it is easy to influence the other countries’ bank. Then, it is lead to the global economic meltdown.
Secondly, after the subprime crisis and housing bubble, the bank began to raise standard for loans. Then, it is lead to the credit crunch, which also means the liquidity shortage. A credit crunch means the decrease in the quantity of money that is available for individuals and enterprises to pay or to borrow in the whole world. Initially, the funding of social reputation cannot meet because the bank and large-scale enterprise are unwilling to offer loans. Then the economic activity cycle is interrupted for lack of money in the real economy. Especially the prolonged monetary tightening will create the severe global downturn.
Thirdly, the global imbalances also as a key factor contributing to the global financial crisis. In an emerging market countries for example China, their excess savings and current account surpluses more than their investment. It was reduced the financial situation in deficit countries and put the downward pressure on world interest rate. Borio& Disyatat (2011) In this way, this phenomenon added the credit and increased the risk in a lot of developed country, especially in United States, consequently, triggered the global economic crisis.
Every country has responses to against the global financial crisis and also in Europe. The economies of European Union jeopardized by the crisis so they have taken a series of measures to cope with the global economic crisis.
First，the government strengthened the supervision system. Specifically, the European improved the functions of the monitoring committee of the European bond. “They established the European Systemic Risk Board (ESRB) to monitor and assess risks to the stability of the financial system as a whole.” Brussels (2009). Meanwhile, they also set up “a European System of Financial Supervisors (ESFS) for the supervision of individual financial institutions.” Brussels (2009) This committee made a set of uniform standards for assesses the risks of transnational institutions. Meanwhile, they also suggested or warned the financial institutions which exist the risk.
Next, the European Union set up a new structure of the financial markets. The basis of this system is not only to implement