TABLE OF CONTENTS Page

Introduction Problem, Aim, Research Question 1 1

PART I : Economic Crises A) How did crise come up ? B) What is the systemic problems that affect the crises ?
C) How Europan economic crises affect the markets ? D) What is crises impact on countries and Europe ? E) Europes Approach to Crisis 2-3 3 3-4 4-5 5

PART II : Political and Social Repercussions of the Crises Another Aspect of Issue : Crisis Policy, Democracy , Governance 5-6

PART III : Solutions Austerity Policy and Evaluation of Applied Models Conclusion Discussion Summary REFERENCES 6-7 7-8 8 9-10

Ibrahim Irdem1 RESEARCH REPORT (THE EUROPEAN CRISIS )

Introduction European Crisis which affect all the Europe and the rest of the world is mostdiscussed subject on the agenda. European crisis, primarly, is a financal crisis that reveals Europes struggle to pay the debts and is a issue that emerges in many areas like economic, political and social. The whole thing began with lousy real estate loans in US and evolved from there. The banks were bailed out by countries. Financal crisis of the US caused all sorts of strictures in the capital movement. When the first germs of crisis started spreading from the US, Europeans were quiete optimistic. The felt that the crisis was a crisis predominantly made in US (sub-prime mortages). But these thoughts were misconceptions. US crisis led to global financal crisis which further spread to Euro zone and caused eurozone crisis as these countries most affected. One of the things world learned in the fall of 2008 is financal viruses are extremely contagius. Contagion is difficult to control. Particularly in Greece; Portugal, Ireland, Italy are most affected countries in euro-zone. High public deficits, trade deficits, budget deficits, counterparty risks between banks and rising interest rates, lack of competitiveness in many economies are the problems that Europe face with. Europan crisis is not just economic-oriented, it has political influence in Europe and rest of the Europe. Countries are struggling to find ways to cope with the financal crisis and its effects. Eurozone crisis is worsening and affects world economy. Currently, International community concens about Europes future. This research report invesitigates the reasons underlying european crisis and by evaluating the financal problems and its political influences, seeks appropriate solutions to exit from the crisis. Problem, Aim, Research Question If the debt crises arent tried to prevent and a healthy progress can not be proceed, chronic lack of economic growth in the eurozone will continue to act as a major impediment to efforts to bring the debt crisis to an end and itll expose new challanges in many areas. The aim of the this research is to discuss the European Crisis and by policy making, try to determine options available in current situation. In this research paper, I ll try to discuss: Which options can be more effective to combat the crises? - Is Austerity, the only cure ? Which way to the exit ? Trying to understand and present Europes complexity situation, I have benefited from various books, journals , scientific articles and websites that adressing the topic in depth. In addition to scientific publications which contain different scholars and economists views and approaches, Jurgen Habermas book, as called The Crisis of the European Union

Irdem, Ibrahim. Masters Student in Linkping University, Department of Management and Engineering, Masters Programme In International and European Relations

: A Response was one of the basic sources. European Instutes and European Commissions datas were also directive in my studies. In this research; firstly, I am taking to economic crise to scrutinize its economic and political reasons and indicate its effects on Europe and the rest of the world. Secondly; as reflections of crises, detritions in democracy and governance will be handled. Thirdly, solution seeking for the crises will be discussed within the scope of politics and economy disciplines. I shall divide my analysis into three subjects above.

PART I : ECONOMIC CRISES

A-)

How did the crises come up ?

Crises resulted from a combination of complex factors, including the globalization of finance; easy credit conditions during the 20022008 period that encouraged high-risk lending and borrowing practices; the 20072012 global financial crisis; international trade imbalances, real-estate bubbles that have since burst; the 20082012 global recession; fiscal policy choices related to government revenues and expenses; and approaches used by nations to bail out troubled banking industries and private bondholders. The global economy has experienced slow growth since the U.S. financial crisis of 2008-2009, which has exposed the unsustainable fiscal policies of countries in Europe and around the globe. In the October 2009, a surprise came from Greece. Budget deficit predicted to be around %3 of GDP, but it was actually %12. Greece, which spent heartily for years and failed to undertake fiscal reforms, was one of the first to feel the pinch of weaker growth.2 When growth slows, so do tax revenues making high budget deficits unsustainable.3 Greeces debts were so large that they actually exceed the size of the nations entire economy, and the country could no longer hide the problem. Foreign investors panicked against Greeces debt deficit. By the early 2010, EU tried to solve this problem. In fact, Greece problem has never solved. EU has very slow decisions because there are so many governments that theyve to have their say. In the face of increasing sovereign debt of Greece, Inverstors thought that and wondered: This is a brewing crisis, how is going to be fixed? Ive got all their bond, shouldnt be worried actually about holding sovereign debt of Greece? Can I count on Germany or Can I count on the ECB for their rescue and pay me off ? I dont think so ! Inverstors responded by demanding higher yields on Greeces bonds, which raised the cost of the countrys debt burden and necessitated a series of bailouts by the European Union and European Central Bank (ECB). The markets also began driving up bond yields in the

Lynn, Mathew. (2011) Bust: Greece, The Euro and The Sovereign Debt Crisis, USA

Istvn P. Szkely, Paul van den Noord. (2009) Economic crisis in Europe: Cause, Consequences, and Responses

other heavily indebted countries in the region, anticipating problems similar to what occurred in Greece. Europe put Greece to diet of austerity and hoped the best. But problem couldnt be solved. If it is asked a question regarding why bonds yields rise up , the reason is quite simple ; when investors see higher risk associated with investing in a countrys bonds, they will require a higher return to compensate them for that risk. The demand for higher yields equates to higher borrowing costs for the country in crisis, which leads to further fiscal strain, prompting investors to demand even higher yields, and so on. A general loss of investor confidence typically causes the selling to affect not just the country in question, but also other countries with similarly weak finances an effect typically referred to as contagion.4 Greek debt crisis had domino effect on Europe. It has reeduced the confidence to European economies. There was a real worry that Spain would be following the Greeks and there were also worries about Portugal. In Spain, Real estate buble bursting, high unempolement levels and borrowing coast put the country into a difficult situation. Spain had the biggest housing buble in the world. Take the case of Italy, The first borrowing coasts have soared, stock market has tumbled and has a debt to %120. European debt crisis washed up Italys shores was in November 2010. There became a lot of meetings but none of acted. A recent article by Zero Hedge suggest that a default on Italys debt would cause much greater financal problems in Euope than a debt default by Greece and arguably could cause more financal problems in Europe than a debt default by Germany- Europes strangest and most important economy. Italys economy is more than twice the size of the combined economies of Greece, Portugal and Ireland. One of the main reasons for the economic problem is, the inflation in PIIGS countries was higher than the rate of interest5. So, PIIGS6 racked up enormous amount of debt in Euros. B) What is the systemic problems that affect the crises ?

The problems created in the euro zone by going for the integration of currency and a monetary union without the prior supportive presence of a closer political union and a fiscal union. It will be discussed in next pages in detailed. A point I will mention here ; when you check the eurozone system, there is a structural contradiction within the euro system; for instance, there is a monetary union without a fiscal union. When euro was created, its founders did not create a fiscal union to match the new monetary union and they didnt provide for adequate crisis management mechanisims.7 The countries are required to follow a similar fiscal patch, but countries dont have a common treasury to enforce it. Countries with the same monetary system have freedom in fiscal policies in taxation and expenditure. So, even though there are some agreements on monetary policy and through European Central Bank, countries may not be able to or would simply choose not to follow it. There is another
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Kenny, Thomas. What is The European Debt Crisis ? (http://bonds.about.com/od/advancedbonds/a/WhatIs-The-European-Debt-Crisis.htm ) 5 World Bank GDP Deflator : http://data.worldbank.org/indicator/NY.GDP.DEFL.KD.ZG 6 PIIGS : Portugal, Ireland, Italy, Greece, Spain 7 Hamilton, Dan, Executive Director of the Center for Transatlantic Relations, Johns Hopkins SAIS

problem that Eurozone, having 17 nations require unanimous agreement for a decisionmaking. So, it is hard to for the Eurozone to respond the problem quickly. C) How European economic crises affect the markets ?

European debt crisis also affected the financal markets. Investors reaction to any bad news out of Europe was swift: sell anything risky, and buy the government bonds of the largest, most financially sound countries. Typically, European bank stocks and the European markets as a whole performed much worse than their global counterparts during the times when the crisis was on center stage. The bond markets of the affected nations also performed poorly, as rising yields means that prices are falling. D) What is crises impact on Europe and other countries ?

The European debt crisis is the term for Europes struggle to pay the debts it has built up in recent decades. Five of the regions countries Greece, Portugal, Ireland, Italy, and Spain have failed to generate enough economic growth to make their ability to pay back bondholders the guarantee it was intended to be. Although these five were seen as being the countries in immediate danger of a possible default, the crisis has far-reaching consequences that extend beyond their borders to the world as a whole. Greece, Spain, Portugalhave faced, given the inflexibility of the euro zone restrictions on exchange rate adjustment and monetary policies. The consequent crises and rescues involving demands for draconian cuts in public services have also frayed peoples tempers. Angry rioters took to the streets. They have strongly exacerbated internecine disaffections within Europe, as is clear from the political rhetoric coming in recent days in very different forms, from the north as well as the south of Europe.8 The costs of failed economic policies extend well beyond the statistics of unemployment, real income, and poverty. The grand vision of a union with a cementing sense of European unity is itself threatened by what is taking place in the economic arena. Those who advocated the unity of a European currency as a first step toward a united Europe have in fact pushed much of Europe into an entirely counterproductive direction for achieving European unity. In order to heal the wounds of the crises; European Union has taken action, but it has moved slowly since it requires the consent of all 17 nations in the union. The primary course of action thus far has been a series of bailouts for Europes troubled economies. In spring, 2010, when the European Union and International Monetary Fund disbursed 110 billion euros to Greece. Greece required a second bailout in mid-2011, this time worth about $157 billion.9 On March 9, 2012, Greece and its creditors agreed to a debt restructuring that set the stage for another round of bailout funds. Ireland and Portugal also received bailouts, in November 2010 and May 2011, respectively. The Eurozone member states also created the European Financial Stability Facility (EFSF) to provide emergency lending to countries in financial difficulty. US has also been affected from this crisis as spiral hence US has interaction with Europe. The devaluation of the Europe triggered by debt crisis will make American exports
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Sen, Armartya. ( 2012) Democracy and Decision of Bankers What Happaned the Europea European Commission (2012), The Second Economic Adjustment Programme for Greece (http://ec.europa.eu/economy_finance/publications/occasional_paper/2012/pdf/ocp94_en.pdf )

more expensive. Government spending and exports have been the only two growth engines of the American economy. Tepid consumer demand, euros depreciated against US dolars and banking system are factors that could affect US. Take the case of China, Euro-zone is one of the most important markets for Chinese exports. It is worried that China exports can be reduced and the debt crisis can lessen the consumer demand. Europes Approach to Crisis

E)

Europes approach to the crisis has been primarily a combination of three elements: (1) bailouts to provide liquidity and financing to debt-heavy governments and prevent a sovereign default; (2) austerity measures and, to a lesser extent, structural reform in the troubled economies: and (3) moderate reform to the way the monetary union functions, such as stiffer sanctions on those government that break debt limits and closer coordination of national fiscal policies. The policy package demanded by the financial leadership of Europe has been, despite its rhetoric, severely anti-growth. The economic growth of the euro zone has been undermined dramatically10, and the GDP there has been falling rather than growing. For many countries asked to cut deficits, they have zero or negative growth rates under an imposed discipline of austerity heaped on recession. PART II : POLITICAL AND SOCIAL REPERCUSSIONS OF THE CRISES Another Aspect of Issue : Crisis Policy, Democracy , Governance The movement for European Unification began as a crusade for political unity, rather than for financal unification and common currency. There was no hostility to economic integration and not even to a financial union; but the uppermost priority was not banking and currency. It was peace and goodwill and a gradually evolving political integration. The fact that political unification has fallen way behind financial incorporation was a later development. The problems created in the euro zone by going for the integration of currency and a monetary union without the prior supportive presence of a closer political union and a fiscal union. These have generated tension among countries with different fortunes within the euro zone, and have also empowered extremist politics of a kind that Europe expected to leave behind.11 Were democratic values applied in decision making for crises decreased ? Democratic process have ignored. Without public reasoning and the informed, financal institutions and financal experts have gone to the their decision. To push toward austerity or cutting expenses to reduce the gap between revenues and outlays has led to public protests in Greece and Spain and in the removal of the party in
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http://www.nytimes.com/interactive/2012/06/14/business/global/understanding-the-european-crisis.html Habermas, Jurgen.(2012) The Crisis Of The European Union: A Response

power in both Italy and Portugal. On the national level, the crisis has led to tensions between the fiscally sound countries, such as Germany, and the higher-debt countries such as Greece. Germany pushed for Greece and other affected countries to reform the budgets as a condition of providing aid, leading to elevated tensions within the European Union. Greece ultimately agreed to cut spending and raise taxes. The tension has created the possibility that one or more European countries would eventually abandon the euro. This concern contributed to periodic weakness in the euro relative to other major global currencies during the crisis period. Shaken by the financal and debt crises, leaders should re-examine their ideas about good-govarnence. Twenty years ago, American political scientist Francis Fukuyama, declared with the title of his 1992 book12 that Western liberal democracy had established itself as the final form of human government Do you think that this claim is stil true ? Financial and economic crises have raised serious doubts about the quality of Western governance. The standards of good governance rise in line with the demands and expectations of the governed. That is true not just in developing and newly-industrialized nations, but for Western countries as well. In this context, protests on the streets of heavily-debted countries- should be remembered13. It is clear that Western is under pressure in the face of global ecenomy. Currency control instruments , have repeatedly proven to be powerless when faced with the sheer might of global financal groups. PART III : SOLUTIONS Austerity Policy and Evaluation of Applied Models Germanys push for austerity (higher taxes and lower spending) measures in the regions smaller nations is problematic in that reduced government spending can lead to slower growth, which means lower tax revenues for countries to pay their bills14. The prospect of lower government spending has led to massive public protests and made it more difficult for policymakers to take all of the steps necessary to resolve the crisis. As I mentioned above, crisis has been primarly combination of three elements; 1) bailouts to provide liquidity and financing to debt-heavy governments and prevent a sovereign default 2) Austerity Measures 3 ) Moderate Reforms15 None of the measures taken to alleviate these three problems have ever been sufficient. Massive imbalances between its members lie at the heart of the euro zones problems. Uncompetitive economies like Spain and Portugal have tumbled into large current account deficits; on the other, stronger economies, especially Germany, that gorge on giant current surpuleses. Euro zones answer has been to force the uncompetitive economies to become more
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Francis Fukuyama, The End Of History, New York, 1992 Zand, Berhand. (2012) Which Country has the best government ?, The Craft of Rulling, Spiegel International 14 Elliott, Larry. ( 2012 ) Germany and France turn screw on Greece over austerity Plans, The Guardian 15 Schumann, Michael (2011) Why Europe cant solve its debt crisis?`, Business Time (http://business.time.com/2011/10/31/why-europe-cant-solve-its-debt-crisis/ )

competitive, by reducing their real costs and wages. But that is a painful process, one that is potentially unsustainable either politically or socially. The austerity and reform programs have been mainly confined to the PIIGS the economies in the crosshairs of investors. Investors are fleeing the bonds of certain European countries because they believe their economies are fundamentally broken, simply uncompetitive compared to either stronger countries in Europe or up-and-coming emerging markets. That means investors dont have confidence in their long-term outlook, and thus their ability to handle their large debt loads. And the budget cutting and minor structural reform taking place isnt enough to change their downward course. The problem, in other words, is not concern over these countries short-term ability to service their debt, but their long-term ability to prosper within the constraints imposed by the monetary union. Many alternatives rescue efforts are being considered right now, such as new bailout packages helped by the financially stronger countries, or the floating of guaranteed euro bonds, or the purchase of Greek, Spanish, and other high-interest bonds from troubled countries by Germany. The long-run viability problem arising from the inflexibility of the exchange rate through the shared euro, even as countries with relatively lower productivity growth (such as Greece and Spain and Italy) fall behind other countries in the euro zone in terms of competitiveness in trade. In the absence of exchange rate adjustments, competitiveness for the countries falling behind can indeed be recovered through sharp wage cuts and other ways of cutting earnings, thereby reducing living standards more drastically than would be otherwise necessary. This would yield much extra suffering and an understandable resistance. That austerity is a counterproductive economic policy in a situation of economic recession can be seen. For a good functioning of economy, public services are essential. Government must provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. There is also a hazard aspect in the austerity argument. Yes, Actually, Austerity esases repayment terms for spendtrift governments but it encourages reckless behavior in the future. Conclusion According to economic model of Kynesian, if the economic in recession period, and in the situations of increasing unemployement, decrasing national income; governments should follow budget deficit policy. The budget policy can be performed reducing tax , increasing expenditures. A decrease in taxes provides an increase in public expenditure and expansion of the private sector investment expenditure as well. Personally, Austerity isnt an accurate way. Thus, in addition to Keynesian policy; other important points should be discussed as below. 7

So, What should be done ? The euro and its member states are being scrutinized by markets because of the potential lack of solidarity and joint risk taking. One of the root problem is that investors fear the euro simply cant survive. To avoid that fate, the doctors of the euro zone have to write up the correct prescriptions. Structural reforms are also necessary in most European economies to bolster competitiveness and boost potential growth. But such reforms take time. Austerity isnt the only cure. Politics can promote private sector investment and innovation that can lead to the wealth creation on which the future of the euro ultimately depends. It should be given importance to public participation in decision-making. It is possible to go to way of European cohesion and solidarity and at same time, it is possible to find a feasable path for all Europe. The responsibility of top politicians is to find a common voice among euro-zone citizens. A shift toward policies to promote growth, supported by the easing of deficit targets and the issuance of eurobonds, is essential to bring Europe back from the brink of sustained recession, to stabilise Europe's financial markets, and to prevent another significant disruption to global capital markets. Europe has been extraordinarily important for the world, which has learned so much from it. It can remain globally important by setting its own house in order economically, politically, and socially. The first step is to understand properly, with some clarity, the policy challenges that Europe faces today. Discussion Summary As we can see, the European Crisis has continued to worsen, giving rise to serious concerns in the international community. It is frightening that, Europe can have bleming political constraints and may drift towards a new war. To save European economy and to capture the Europes old strenghts, Whats necessary ? One is EU countries lurch together and establish more integrated fiscal union or they fall further apart ? Will Europea substitute its costly welfare system ? Will Europea be able to have more entreprenual spirit ? According to me, Europe must act together. Eropea must struggle difficulties together. I think, some countries ( want to pass their own currency) ideas and applied tight austerity policies are not useful and a solution. If a country go back to their own currencies to print it and repay debt, citizens will be affacted . Because the currency will not remain of any real value. So, the citizens of country will try and move their money to either assets like gold or will contunie using the euro. This can lead to bank-runs with all people at same time demanding their money back. This, of course can lead to bank collapsing. In addition, such a this case; investors and firms would shift their deposits or claims on other euro-area governments, this leads to a bon-market crisis. This is also mother of all financal crisis. What is need now , countries can re-balance their economies and fiscal tightening can be established by Eurozone countries. As the alternative strategy to austerity policies, long term investments and fixing banking system can be effective way.

REFERENCES Books Fukuyama, Francis. (1992) The End Of History and The Last Man, New York Habermas, Jurgen.(2012) The Crisis Of The European Union: A Response, First Edition,UK 9

Lynn, Mathew. (2011) Bust: Greece, The Euro and The Sovereign Debt Crisis, USA Articles in Newspapers and Journals Elliott, Larry. ( 2012 ) Germany and France turn screw on Greece over austerity Plans, The Guardian ( http://www.guardian.co.uk/world/2012/aug/23/germany-france-greece-eurozoneausterity) Kenny, Thomas. What is the European Debt Crisis? (http://bonds.about.com/od/advancedbonds/a/What-Is-The-European-Debt-Crisis.htm) McClain, Dylan Loeb. ( 2012) Understanding the Europan Crisis Now, New York Times (http://www.nytimes.com/interactive/2012/06/14/business/global/understanding-theeuropean-crisis.html) Sen, Amartya. (2012) What happened the Europe? , The New Republic ( http://www.tnr.com/article/magazine/105657/sen-europe-democracy-keynes-socialjustice?fb_action_ids=4027995571961&fb_action_types=og.likes&fb_source=timeline_og&a ction_object_map=%7B%224027995571961%22%3A10151061830982719%7D&action_typ e_map=%7B%224027995571961%22%3A%22og.likes%22%7D&action_ref_map=%5B%5 D ) Schumann, Michael (2011) Why Europe cant solve its debt crisis?`, Business Time (http://business.time.com/2011/10/31/why-europe-cant-solve-its-debt-crisis/ ) Zand, Berhand. (2012) Which Country has the best government ?, The Craft of Rulling, Spiegel International (http://www.spiegel.de/international/world/good-governance-serieswhich-goverment-is-best-a-845170.html) Offical Websites Istvn P. Szkely, Paul van den Noord. (2009) Economic crisis in Europe: Cause, Consequences, and Responses A report by the European Commission (http://ec.europa.eu/economy_finance/publications/publication15887_en.pdf) Teulings, Coen. (2011) Europe in Crisis: General Conclusions, CBP Netharlands Bureau for Economy Policy Analysis, 2011 (http://www.cpb.nl/en/pressrelease/3211045/europeandebt-crisis-requires-more-europe) http//www.Ucl.ac.uk/europeaninstitute/comment_analysis/eurozone/2011_09_WCarlin_Euroz one_layout.pdf ( European Instute, Washington ) European Commission (2012), The Second Economic Adjustment Programme for Greece (http://ec.europa.eu/economy_finance/publications/occasional_paper/2012/pdf/ocp94_en.pdf ) World Bank GDP Deflator : http://data.worldbank.org/indicator/NY.GDP.DEFL.KD.

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