Money And Banking Essay

2460 WordsDec 2, 201110 Pages
Money, Banking, and Financial Markets Name: College: Course: Tutor: Date: Money, Banking, and Financial Markets The European financial crisis is threatening to spiral out of control. Though there is much debate about its cause, the consequences are clear for everyone. The euro is in trouble. The problem started with Greece becoming insolvent. Rapidly, other countries followed suit. They include Ireland, Portugal, Italy and Spain among others. The financial crisis has its basis on the shortage of finances to fund government expenditures. Consequently, some countries have sought bailouts from the EU and the IMF. Owing to the extent of the financial crunch, it has been extremely difficult to meet financial demands. As a result, the crisis is escalating by the day. This has resulted to massive bailout packages in an attempt to arrest the situation. Consequently, the high demand of financial resources has traversed the entire EU economy. This has hurt other investors as they compete with governments for credit. This paper examines an article appearing in The Economist by the title “Beware of falling masonry”. It attempts to underscore the dynamics behind the Euro zone crisis and suggest solutions. As a result of the financial crisis Central Banks in Europe have resulted to dumping bonds in the market in an attempt to accumulate capital and boost cash flow (The Economist, 2011). The cuts in government expenditure have added damage to an already awful scenario. These two factors have led to a reduction in the money supply in Europe. The Euro has become scarce. As a result, the cost of credit has shot up. When the cost of borrowing goes up, it becomes difficult for both investors and consumers to access loans. When this happens, investment and consumption both reduces derailing the economy further. This occurs because of two key reasons. First, the investors lack

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