Causes of Eurozone Financial Crisis

Financial crisis did not start just one day and affected the whole European Union. Many countries that were thought to be invincible were affected. The list includes Greece, Cyprus, Spain, Ireland, Portugal, Germany and, Italy. The factors were at play for very long time and its impact is long lasting with some nations thinking of separating themselves or advocating other nations to separate from European Union.

  1. Development of Virtual Money instead of Real Money. Development of virtual money (financialization on Wikipedia) over real money from industrial or agricultural economies. Since the return from virtual money was significantly more than real money, industrial and agricultural outputs from these economies significantly dropped leading to more imports and less export.
  2. Boom and collapse of Shadow Banking System
  3. Development of virtual money led further to availability of easy financing which further lead to risky endeavors by individuals and more spending. Savings came to an all time low and avoidable expenses such as frequent vacations became mainstream.Champagne Falling From Table
  4. Feeling of invincible prevented government or people to get on their toes when financial crisis was at the horizon (Reference The Cyprus crisis – A simple assessment of what happened and what needs to happen). European nations are among the richest in the world and they have high Human Development Index. Had the people believed the Tsunami of Economic Crisis then they would have worked on improving productivity, reducing reliance of organizations on outsourcing.
  5. Bad practices adopted by financial institutions (Reference Financial crisis of 2007–08)

    1. Subprime lending and burst of real estate bubble.
    2. Weak and fraudulent underwriting practices
    3. Predatory lending or bad trade practices. False promises made and not fulfilled by financial institutions.
  6. Deregulation of financial institutions by governments.

The European Crisis is still far from over and recent report suggests that while more jobs are getting created in US, unemployment is expected to worsen in Europe.

Leave a Reply