The European Debt Crisis Essay

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ECON-332 Paper Assignment Fredrik Rosenlöf 12/02/2011 The European debt crisis: Causes of the crisis Introduction: Currently, the advanced world is experiencing the most severe financial and economic crisis since the great depression in the 1930s. The crisis started with the fall in U.S. housing prices and the subsequent subprime crisis in 2007 that spread to the rest of the financial markets. Because of the interconnectivity of the world’s financial markets, this spread outside the U.S. like a plague to the rest of the world. But since the acute part of the financial crisis with its liquidity problem has been somewhat resolved, the crisis has turned into an economic debt crisis with the Euro zone in the front line. This paper will examine the causes of the European debt crisis with focus on the Euro zone 1 and how it could go from mainly a question of defaulting financial companies and banks to become a question of default of entire countries. It will also try to indicate the relative importance of fiscal issues, banking sector issues and governance issues (which I define as one or both of a poorly national governed management and a poorly functioning Euro zone framework) for the crisis. This will be done on a general level as well as more in depth by comparing the situations for the more distressed countries like Greece and Italy. The paper will end with a personal conclusion from the author. The development of the financial crisis of 2007-2008 and the immediate European consequences: The first signs of a severe crisis began in 2007 when the U.S. housing market started to drop significantly in value. This made it hard for some U.S. financial institutions, which up till this point had made a good profit of transiting U.S. mortgages in securitized form (mainly 1 Comprising the current 17 membership states of the EMU who has adopted the Euro as a
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