ECON 2322 GFC essay - Since early 2007, outbreak of the...

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Since early 2007, outbreak of the global financial crisis have been perceived to be the most severe since the Great Depression, where it has pushed the European community through a number of different stages. It began with the economic growth steadily losing its momentum which later saw Europe been hit by three substantial negative exogenous shocks, commencing its very first stage. Subsequently the economy slipped into recession and eventually causing the increase of economic divergence in the area. Throughout of these stages, the economic and financial instituitions of the New Europe like the European Central Bank (ECB), European Union (EU) , International Monetary Fund (IMF), World Bank, European Investment Bank(EIB) and the European Bank for Reconstruction and Development (EBRD) have all attempted to assist with European recovery but with varying effectiveness. To begin with, the initial stage was characterised by three negative macroeconomic shocks of an extended credit cycle coming to an end, sharp increases in commodity prices and peaking housing cycles, when combined simultaneously caused an inflationary impact on Europe. Since mid-september 2008, turmoil in the international financial markets have eroded the once favourable financing conditions for European firms and households. The situation intensified upon the bankruptcy of Lehman Brothers, as short-term borrowing costs and interbank lending rates soared, reaching well above the European Central Banks (ECB) minimum bid rate. The energy and food prices rose sharply during this period accompanied with the appreciation of Euro, causing both headline and underlying inflation to reach 4%, which doubled ECB's price stability objective, therefore a fall in real disposable income was imminent. Among this, the peaked housing cycles in a number of Euro areas have led to the decline in construction activities approximating around 6%, thus dragging down Europe's GDP growth in the short run. In addition to this, the second stage saw the European economy slipping into recession where it experienced consecutive sharp contractions in economic activity with a record breaking of 4.5% year on year in the first three months of 2009. The contraction together with tighter financial market conditions had an extremely negative impact upon Europe where consumer sentimentality and business confidence have plunged to record low. So in the face of uncertainity, this has resulted to a downturn in investment expenditure with a vicious cycle of falling aggregate consumer demand. When goods and services are less demanded, the production levels plummetted causing high unemployment in the euro area. The downward economic indicators have also heightened risks in geopolitical instability and social unrests as well as transforming political policy agendas. Apparently in the business environment ranking of EIU it saw an increase of social unrest from a total of 12 out of 16 countries in 2009-13 as opposed to 2004-08.
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This note was uploaded on 03/25/2012 for the course ECON 2322 taught by Professor Kevin during the Three '12 term at University of New South Wales.

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ECON 2322 GFC essay - Since early 2007, outbreak of the...

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