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Europe's Financial Crisis: A Short Guide to How the Euro Fell into Crisis and the Consequences for the World is a book written by John Authers. The book discusses the Euro and its history as well as its future prospects with respect to the Euro crisis. In general, this author is more interested in what the Euro really means within the global economy and thus why the Euro crisis should be a concern for the entire world. By explaining the Euro crisis and its causes, this book elaborates on why the total Europe’s recovery may be impossible currently considering that there are by far a great number of underlying factors that collaborated to create the crisis. One of the major arguments is that the formation of the Eurozone was not as timely and effective as it may have been perceived. According to the author, the numerous countries within the Euro zone were at different stages in relation to their economies; thus, making a unified currency was a rather premature consideration. This is one of the greatest impediments to the success of the unification, which explains in part the Euro crisis and its persistence. Among other things, it can be noted that John Authers holds a strong opinion on why the US and other countries cannot stand back in as far as this crisis is concerned. The global economy is interlinked on a number of factors including the Euro Zone. As a result, the Euro crisis is likely to affect the global economy significantly and alter the global financial system. The paper reviews the five major arguments that the author advances in the book. These arguments include: genesis of the Euro and the emerging markets, currency wars, democrats versus technocrats, the banks and Wall Street, 2012 and beyond.
Genesis of the Euro and the Emerging Markets
The genesis of the Euro and the effects of emerging markets are discussed in the first chapter of the book where the author argues that the Euro zone was created long before the member states were ready for currency unification. Before the crisis, it can be noted that each of the member states enjoyed an incredible sense of economic stability with low interest rates, high spending and a significant amount of government revenue available for use. With the crisis, these countries have had to rather unfavorable terms related to revenue and credit. To understand how this happened, it is important to pay attention to how the euro appeared first. According to Authers, the whole idea of the Eurozone was to consolidate the economy of the member states, to allow collaboration for growth in the international context and to generally enable it working together as a region to dominate the global economy. In this case, the argument presented in the book is that, while the idea of unifying the region economically was actually noble, unifying the currency was not a good idea. Each of the member states was at a unique position economically, and some had a political advantage over others. For example, Germany has always been able to break the set rules and regulations without any retribution. This means that the region was not formed on an equal platform, and thus, some countries could barely meet the region giants’ standards. These kinds of discrepancies ensure that an economic block with a unified currency system would not work, especially in the long term. It is in this sense that the author’s arguments are valid. If the European nations within the Eurozone were able to operate from a level point of view, they would have a better chance to deal with a crisis than they do now. While some of the nations were busy operating with surpluses, others were accumulating deficits and borrowing beyond their means in order to sustain their expenses. This resulted in an overdrawn reserve that had previously been meant to prevent a crisis.
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According to the author, the emerging markets are considered as the largest players in the commodities market, which makes them a pivotal part of the global economy. These markets, with China at its forefront, can be considered as the largest consumers and producers in the world, and anything that affects them tends to threaten the global economy. In the case of the Eurozone, it can be seen that the banks are the greatest problem in the context of external threats. With the euro crisis, the whole asset classes started adjusting as they took cues from the Federal Reserve. In this case, each specific industry was trying to adjust in order to prepare for the ensuing challenges in the economy. Therefore, the emerging markets were more probable victims in the whole crisis considering that they also were mainly under the influence of the European banking system. With the failing global economy, the emerging markets also faced a financial crisis of their own. Considering dropping stock prices and unfavorable debt structures that only worsened the already bad situation, these markets were forced to come to terms with their economic interconnectedness with the European banking system. The book argues that inefficiently priced markets were to blame for the global crisis in 2008. This is accurate based on the fact that the markets, both developed and developing, take on cues and set prices aimed at gaining profit within the relevant parameters as dictated by the state of the economy. In this case, the failure of the markets may be seen mostly in the emerging markets, but the real problem started with the bloated banking system in Europe. These banks ventured into many branches of the economy including lending international businesses thus creating some level of dependence that proved unhealthy for the economy.
Currency wars are known to trigger some serious levels of market volatility thus threatening the stability of the economy. Initially, the exchange rates were driven by GDP growth and international trade flows. However, currently, this is not the case. The currency wars are started when nations decide to devalue the euro in favor of their own currencies. Considering that the national central banks can apply extraordinary monetary policies and increase the value of their currencies, it places the euro in a difficult situation. During the crisis, the dollar had gained significantly while the euro kept spiraling downwards. In the end, the euro was losing value as countries such as Germany worked hard to gain value for their own currencies. While fighting against the common currency, these nations started to take the euro hostage thus causing the euro crisis. Within an ideal market, it can be noted that exchange rates would be accurately determined by the prevailing circumstances of the market. However, the global economy is no longer ideal as more countries try to tip the scales in their favor. Following this kind of reasoning, it is only understandable that ripple effects of the manipulation would cripple the economy. In addition, considering the interconnectedness of the regional economy, the author in this book is very accurate on blaming the crisis on the currency wars that were started in Frankfurt and resulted to spreading out across the region. As each country sought to create an advantage for itself, they all began to work together to undermine the value of the euro not only within Europe but also in the international markets.
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Democrats versus Technocrats
The whole concept of the EU initially had a democratic underpinning of unity and consideration on an equal basis for all the member nations. The emergence of the technocrats then created some divisive politics that divided the region into creditor nations and debtor nations. With policies being crafted along these lines, the EU was rather unable to introduce some effective measures for dealing with their looming crisis. This book highlights the role of the technocrats and their radical proposals as an underlying factor in the euro crisis. All the proposed remedies that were adapted as a desperate measure to salvage the situation created severe consequences that further deteriorated the European economy. According to the technocrats, the credit crisis in the US was not going to have any effect on the European economy. This was a great miscalculation that resulted to leaving the region unprepared for the crisis ahead. In addition, these technocrats are more of ‘men in white coats’ and their involvement in the policy making process is not based on their obligations to the people. Democrats are more focused on helping the people in the European Union by rescuing the defaulting creditors and creating policies that would enable the region to manage economic challenges from external sources while also helping each other out as a region. The technocrats seem to have more policy making power in the region thus making the elected democrats powerless. This played a significant role in the crisis as it allowed the institutions to take precedence over the citizens of the various member states. Democracy is meant for the people while the technocrats were more focused on the institutions and policies.
Within an ideal economic context, it would be expected for the government to rescue a bank with ease. The reason for this is the fact that banking regulations are supposed to limit the actual size of a bank. However, within the Euro zone, this was not so. The governments may have been able to regulate numerous aspects of the unified economy, but they allowed the banks to grow very big. Other than the ordinary financial services in relation to banking, these banks were also able to venture into many other businesses including insurance and development, among others. Without the regulatory policies to limit the size of the banking institutions, the governments were unable to help effectively in the face of the recession. This situation means that the governments allowed these institutions to get out of control and dominate the economy with no systems of checks and balances that would have kept them within a manageable scope. As such, when the banks failed owing to the recession, the respective governments had no means of rescuing them. This means that the financial services industry started to collapse along with the national and thus regional economies. Thus, the book presents the argument that the lack of regulations within the financial services industry contributed greatly to the euro crisis. Banks often define the state of the economy and when they fail, this means that the economy is in trouble. A number of investors have to share in the losses, with many of them deciding to entirely withdraw from the market altogether. This means that the bank does not just fail as a single institution but rather starts repelling new and existing investors thus costing the country much money in the long term. Therefore, it is considerably accurate for John Authers to blame the euro crisis on the randomness of the European financial services industry that had been allowed to grow wildly and take control over a large portion of the region’s economy. If these were just banks and nothing more, they may have had a less severe impact on the economy.
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According to the author, the bankruptcy of the Lehman Brothers exposed the severe weaknesses of the European banking system that had grown so interconnected to the point that this bankruptcy actually pushed the union into recession. As governments were forced to rescue the banks, the citizens lost faith in their politicians and almost every sector in the business platform was forced to register huge losses. Considering the economic structure within Europe, it is understandable that the interconnectedness could have caused the problems that defined the recession. The European financial industry is difficult to define considering that there are numerous issues related to inter-relationships that make it seem a complex web. Each institution has ties with numerous others, and in the end, it may be noted that there are a number of institutions that only operate independently on paper but are practically a branch of another institution. For example, when the Lehman Brothers collapsed, it was not considered possible that it would affect the rest of the financial industry significantly. Nevertheless, this bankruptcy caused several ripples that also brought down numerous other banks and financial institutions. With the failing financial institutions, the governments in the region faced the need to insure their banks. For example, Ireland offered a guarantee on all of the monies in the banks despite knowing well that they lacked the capacity to provide such a significant amount of money. When the financial sector is heavily interconnected, the interconnections act as a support system in times of crisis. However, these ties are just as effective in collapsing as they are in supporting.
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Wall Street, 2012 and Beyond
When the US was undergoing a credit crisis, the technocrats in the EU decided that they would not be affected. Consequently, when the US companies decided to repackage their debts and sell them to European companies, there was no alarm raised within the European market. Nevertheless, the outcome of these transactions actually worsened the euro crisis considering that the market was left unstable and thus unable to support its own turbulences that were slowly growing. With the Wall Street collapse, the European market could have cushioned itself by avoiding the remedial transactions initiated by American banks to save the American economy. The only thing that these transactions did was transfer the credit crisis from one continent to another. Selling off the debts to the Europeans resulted in a transferred debt that saw the Europeans being owed more than they may ever be able to recover. John Authers argues in the book that while the American banks were simply trying to salvage the American economy, the European Union should have evaluated the possible impacts of these transactions before allowing the European banks to but American debts. Without this consideration, the banks were allowed to make transactions that would result in major losses and eventually undermine the regional economy. In this case, the role of the EU was to predict the market conditions and warn the financial services sector on the impacts of the American credit crisis on their operations. Ignoring the interconnectedness of the global economy was a wrong move, and it may have been the strongest factor amongst the various factors that contributed to the euro crisis.
Furthermore, this book also addresses the situation in the EU after the euro crisis in terms of on the present posture of affairs and the future of the region after the economic meltdown experienced in 2008. In this section, the main argument is that the risk of another economic meltdown is ever present for as long as the economy is over synchronized with big names taking on the format of the Lehman brothers and the Washington Mutual, among others. Thus, for as long as there are singular entities that can trigger a failing economy, there is always the risk that something could go wrong and that the governments would face another situation of ‘too big to fail’ with respect to the financial institutions in the industry. In addition, while the lessons may have been presented very clearly in the euro crisis, the recovery has been rather slow because of the ripple effects that influenced the entire world. With most countries facing severe consequences of the euro crisis including the falling stock markets in the emerging markets, there is very little possibility for a fast recovery from the crisis. Considering such countries as Greece continuing to spend beyond their budget and defaulting on debts, Authers assertions are again relevant and accurate in that the crisis is far from dissolution. In 2012, the euro was still falling against the dollar while some of the local currencies within the EU continued to gain against the euro. This is another considerable trigger for the euro crisis, and the currency brokers have not learnt their lesson yet.
As a book providing insights on the Euro crisis, Europe's Financial Crisis: A Short Guide To How The Euro Fell Into Crisis And The Consequences For The World by John Authers is not only well researched but also very informative on the whole issue of the European economy. The author provides a number of arguments that form the basis of the euro crisis and the future of the European economy based on the euro crisis and the region’s efforts towards recovery. Ultimately, it can be agreed that the euro crisis was as a result of a combination of factors, most of which were rather avoidable if only the right considerations had been made during the decision making processes within the EU.
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