The Economic and Financial Crisis: Genesis and Exit Strategies

The crisis shortly comes to Europe, but some European countries viewed the financial crisis as a purely American phenomenon. That view has rapidly changed as the economic activity in Europe has declined and also the global trade has declined sharply eroding the prospect to use the export to mitigate the lowering demand in European market. In addition public protest for the rising rates of unemployment and concern over growing financial and economic turmoil are increasing the political stake for European Government and their leaders.
The crisis, by straining the tied that bind together the members of EU, could present a significant challenge to the ideal of solidarity and common interests.
European country are also concerned over the impact the financial crisis and the economic recession are having on the economies of eastern Europe and the prospect for political instability as well as future prospect for the market reform.
That crisis shows the growing interdependence between financial market and between European and United States of America economies and also shows that the synchronized nature of the current economic downturn probably means that neither United States nor Europe could emerge from the crisis alone.
According to the International monetary fund and the European Central Bank, many of the factors that led to the financial crisis in the United States create a similar crisis in Europe. Essentially low interest rates interest rates and an expansion of financial investment opportunities that arose from credit expansion, the growing complexity in mortgage securitization and the loosening standards that generate a rapid rate growth, which pushed up the value of equity, commodities and real states.
Over time the combination of higher commodity prices and rising housing costs reduce the consumers’ budgets and they begun to reduce they expenditures.
Consequence of the drop in consumers spending was a slow down in economic activity and a reduction of the price, also the house price, that led to a large scale downgrade in the rating of subprime mortgage backed securities and the closing of number of hedge fund with subprime exposure, the wave of the crisis spread quickly to other financial sectors. The rise in uncertainty and the drop in confidence undermined the confidence in major European banks and disrupted the interbank market that made a huge problem in short term liquidity.
Now the member states should take advantage of the strengths of Europe possible by effective coordination, credible frameworks offered by the stability and growth pact and the Lisbon strategy, as well as the benefits of scale offered by the euro and the largest single market in the world.
With the crisis that nock the framework of the European banking sector and by that way also the entirely European market the Prime ministers of the EU countries during the Paris meeting at the early of October had write down the fundamental framework action for the European banking bailout plan. The Plan has its root on the plan adopted by Sweden during the early 1990s to resolve the financial crisis affecting the country. The European bailout plan include in it structure two main features of the Swedish plan: the state guarantees, direct or indirect, to allow financial institutions to access to short term funding; a recapitalization plan for certain institutions.
The Swedish plan has provide a foundations for the response to today’s crisis but there are significant difference between the situation facing Sweden during the northern country crisis of 1990s and the current problem in the credit market.
The key difference is the nature of mortgage backed securities and the collateralized debt obligation implicated in the 2007 crisis, that make considerably more difficult to value banks underlying assets, and consequently farm more complicated to attempt to transfer out bad assets. In addition to that the today’s financial crisis has take a global dimension and had put greater stress on the world financial system.
So the Europe has follow the path outlined time ago by Swedish Government but the implementation of the plan has encounter the problem of “State Aid “ which is prohibited in European Union, as mentioned in the Treaty of Rome, state aid is defined as “any aid granted by a member state or through state resource which distort or threatens to distort competition by favoring certain undertakings or the production of certain goods.”