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Global Financial Crisis Essay

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The Global Financial Crisis and its Impact on EU Governments

Summary
Despite the efforts of the Federal Reserve and Treasury Department to prevent the collapse of the U.S banking system, the Global Financial Crisis (GFC), also known as the Financial Crisis of 2007-2008, since the Great Depression in the 1930s, was considered to be the largest and most severe financial event, which reshaped the world of finance and investment banking[1]. During this period, Millions of Americans lost their jobs; millions of families lost their homes; and good businesses shut down [2]. The main cause of the GFC was the Subprime Mortgage, high risk mortgage lending, of financial institutions, such as investment banks in the United States. However, there were other factors, which contributed to the GFC, such as regulatory failure, inflated credit ratings, and investment bank abuses. As a result, the 4th largest bank, Lehman Brothers, filed for Chapter 11 bankruptcy, stock-broking firm and Merrill Lynch, an investment bank, were taken over and Goldman Sachs and Morgan Stanley sought banking status in order to receive protection from bankruptcy [3]. In order to stop further collapse of the financial market, the U.S government made its most dramatic interventions in financial markets since the 1930s[4]. The EU Commission’s forecasted that GDP was expected to reduce by 4% in 2009 in both the EU and the euro area. Due to the shock imposed by the GFC, the budget deficits were set to more than double in 2009 in the EU, rising up to 6% from 2.3% of GDP in 2008 [4].

Impact on EU Governments
The GFC caused a decrease in government revenues, but an increase in government expenditures in terms of GDP in 2008 and 2009, which significantly deteriorated deficits ...

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...wever, at the end of 2008, Germany was hit by the crisis through two channels; 1) Finance as many banks were overexposed to toxic speculative papers originating in the U.S and Ireland. Both private banks, such as Commerzbank and Hypo Real Estate, public banks had to be rescued by the government’s public guarantees costing €400 billion and 2) Export industry as the international demand decreased significantly [16]. Although, the spending in the financial sector could harm Germany’s government debt in short-term, the debt was expected to maintain its position with low interest rates and capital gains from privatisation. With a strong financial position, Germany was expected a balanced budget, after spending on recovery plans. Though, Germany’s government debt to GDP kept rising since 2008 until 2011 from 64.9% to 82.5%, then decreased by 2.5% from 2011 to 2012 [17].
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