NASTASE IOANA ALEXANDRA

CIG An 1 Grupa 2.

The current economical crises in

Europe
Following a major banking crisis in Western Europe, Central Europe and the
Balkans could be the ones suffering most. Since the beginning of the decade, Central
Europe has consistently outgrown Western Europe, with 5.8 percent gross domestic
product growth in 2007 compared to 2.6 percent for the euro area. But the capital that
made that growth possible has come from Western Europe.
The European Unions eastward expansion has in some ways been motivated
by the prospect of opening up new markets where capital could growth, because
Western Europe is less likely to be able to sustain more than 3 percent growth a year.
Essentially, Central Europe has offered greater return for investment throughout the
current decade. While foreign direct investment in east-central Europe made up 40
percent of the net inflow in 2007, the rest came from the now-volatile Western
European banks, which sunk more than $1 trillion in assets into Eastern European
markets. That would be a lot of assets to pull out to shore up reserves at bank
headquarters in Western Europe. Central Europe, and particularly the Balkans, would
have a difficult time coping with such a move.
Central Europe and the Balkans are also susceptible to a severe crisis because
foreign banks have loaned a lot of money to domestic banks. In many cases, a
countrys entire banking system (such as Serbia) is actually foreign-owned. Western
banks involved directly in eastern and northern Europe (Scandinavian banks in the
Baltic states and Austrian and Italian banks in the Balkans) were not involved in the U.S.
subprime crisis, but they could be vulnerable when the rest of the major Western banks
decide to pull back their capital to shore up dwindling reserves or investments closer to
home, thus affecting the total cost of credit.

On top of this, the financial institutions in the new crop of Central European
banks are inexperienced, and even with the best due diligence and tightest lending
rules (which are not yet in place), they are going to have a rocky start, which goes
without saying for the banks in the Balkans.

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The economies had persistent a situation in which income exceeds

expenditures, low unemployment, high saving rate and moderate inflation rate.
However, the economies became increasingly more vulnerable to external
shocks due to factors revolving around capital flows, which the globalization of
financial markets driven on by the rapid development of IT has resulted in a
surge of capital flows to developing countries and also the moral hazard problem
had shown the perception by investors of guarantees by government for their
borrowings from international lenders. In the same way of mispricing of risk for
European crisis are lack of an effective institution of government policy for
dealing with the budget control device.
When Europe government's total expenditures exceed the revenue that is
generates and debt was spread rapidly across international capital market. This
situation has made the market participants started reversing the mispricing.
Therefore, the immediate reversal of capital could made the Euro zone into
trouble and urge to seek help from International Monetary Fund (IMF) which is an
organization to secure financial stability, promote high employment and
sustainable economic growth and reduce poverty. Hence, the government should
have taken an important role to estimate the risks which are in the Euro zone
crisis and Asian crisis.
They also should have made some policies aimed at improving the
fundamental through budgetary, whereby mispricing in public sector has
triggered a capital market disruptions. Thus, government increase their spending
to attract more investor to come in and its sustainability can be assured through
institutional renewal and lead to more prosperous.
Subsequently, both crises are found to be results of a failure of carrying out the
essential pre-conditions. To be sure, there are three important preconditions for
moving to capital account liberalization in Asian crisis, which are a strong
domestic banking system, relatively developed domestic financial markets and
the exchange rate at which the supply for a currency meets the demand of the

same currency. In fact, Asian countries has the rapid growth disguised the extent
of risky lending to invest in capital market from the banking system.
For example, in Malaysia has less restriction in controlling the capital flows
so it caused the price of capital is overheated in the capital market. Similarity to
the pre-condition for integration in Euro zone crisis, the countries in the Euro
zone have the low integration within each other in the economy phenomena.
They have been failure in monitoring their currency "Euro" in the economy
structure and cause the economy collapse. So, Mr. Cameron has said that the
uncertainly surround the euro zone is the biggest threat to global prosperity and a
"whole series of measures" is needed to restore market confidence in the ability
of countries to pay their debts and support banking liabilities." In brief, the Asian
countries government should monitored the capital flows to prevent the capital
price fluctuate.
On the other hand, for the Euro zone countries government should cooperate with each other to control the currency. Of course, the Asian countries
should also fulfilled for the preconditions moving to capital account liberalization
to avoid falling into the crisis. This is the precondition could be prepared to
control price of capital in the market. Accordingly, Euro zone countries have to
move towards a common "banking union" to control the currency. This may help
a country to solve the economy problem and get back to a healthy economy
level.
Conversely, both crises may be bringing into trouble with policy paralysis
and crisis induced political become liquidity, so the countries that closely
connected with it are using different method of policy and political perception to
solve it. In Asian crisis, government might using fiscal policy which is government
will increase their spending or decrease taxes to ran out of it.
Also, most of the countries in Asia are trying to reduce the interest rate
and enforce an action to stimulate aggregate demand that is the total purchase of
customers through fiscal expansion policy. In other words, South Korean are one
of the role model that experienced a rapid recovery from this crisis. In contrast,
Euro zone are more emphasize in monetary policy instead of fiscal policy which
is the central bank will increase or decrease the money supply to solve the Euro
zone crisis.
During the recession in Euro zone, most of the companies started to hold
back the fixed investment and the consumption may be declining. Back to the
scene, this unstable economies circumstance affect the consumer's confidence
and caused it to fell. Equally important for those countries that experienced a
boom and bust in the housing market, this is due to the government simply offer
loan for those people who are not qualified to get loans, for instance, no job, no
income and no assets citizens. This would be a very risky action done by the

Euro zone government, because those people may not able to pay the loans and
began default when the housing price raise up. In particularly, monetary policy
became extremely appreciative in the Euro zone countries.
Certainly, government were lower down the interest rate and the
impressive liquidity support to the financial sectors will be provided by central
banks. Lately, crisis that bring on political goes liquidity. In Asian, the current
account deficits were driven largely by rising domestic investment especially in
Thailand and Malaysia. Moreover, Asian governments allowed their currencies to
depreciate in nominal term to regain external competitiveness. On the contrary, in
the European, the current account deficits were more caused by rising
consumption and reducing national savings. While the European have been
constrained due to a common regional currency (Euro) implying the need for
painful and drawn out adjustment via cuts in domestic wages and other cots.
As a result, the similarities and differences for both crises that caused
them descend into failure are based on devalue the pricing of risk and also the
pre-conditions. In addition, the countries that involved in both crises intend to
implement policy to analyze but unfortunately, it caused some of the countries
loss of ability to move.
Based on our judgment, the Euro crisis affects not just the European
economy, but the global economy as well. Policy makers around the world must
make efforts to contain the crisis as much as possible. Asian countries are quite
disparate in terms of the stage of economic development, the openness of their
capital accounts, the strength of their banking and corporate sectors, the maturity
and strength of regulatory and supervisory institutions, and their political
systems. However, in terms of exposure to a capital account crisis, they can be
organized into two groups: the economies that have substantially liberalized their
capital accounts, and the economies that have not yet substantially liberalized
their capital accounts.