What Caused the European Financial Crisis and How Can We Fix It?

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The European Financial Crisis

A Look at What Happened And How Can We Fix It

1. What are the causes of the European financial crisis in a nutshell?

The European financial crisis is due to a few factors. One factor is the borrowing of money. Countries in Europe were able to borrow money at relatively low interest rates. The low interest rates lured countries into borrowing large sums of money. The promise of a low interest rate made the repayments affordable and reasonable. There was a period of euphoria where money was being borrowed and paid back without any issues. However, soon the interest rates began to rise substantially. These rising interest rates meant higher repayment amounts for borrowers. The countries were unable to keep up with these higher payments. This led to default on the repayments. If a country cannot repay its debt then it will default on the loans it took out. If a country in the Eurozone, a country using the euro currency cannot make its repayments and defaults, then the flow of cash in the euro zone will stand still. The increase of cheap debt and the rising interest rates created a snowball effect. This is similar to the housing crisis that occurred here in the United States.

Who is responsible for the crisis, and why?

The crisis in Europe began when interest rates on bonds from the government began to rise which caused financial markets to lose confidence in the creditworthiness in countries in the EuroZone. The rise in interest rates and inability to repay debt forced the government to start bailing out countries. Financial deregulation and liberalization allowed banks in the Eurozone countries to increase leverage and raise the amount of money that was being loaned out. This increase in loans being made and the amount being loaned caused a boom in the real estate market, similar to the United States. Also, the lack of regulation of the banks by the government led to a credit crisis. The bailouts led to the governments taking the responsibility for private debt that was incurred through banks. As the government started bailing out banks it started incurring large amounts of debt. The more debt that the countries would incur led to it increase in the countries’ debt level. This led to a steep decline in revenue for the government.
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