Flaws in the Eurozone System
The Eurozone is the organization of the countries that use the euro. Before the coming of the 2008 financial crisis, this economy was thought to be remarkably stable and unlikely to experience predicament in the near future. Many people and nations could not doubt the actions, as well as other decisions that were made by Eurozone. The banking services of this region went without being regulated and without information about the statuses of these banks and were not revealed to the public in a meaningful way. Economic crises came up with effects that were too immense for the individual economies, the Eurozone, and the global economy to ignore. Subprime and the sovereign debt in which banks and investors have lost a lot of money are the greatest indicators of causes and effects of the European economic crisis (Allen and Alphande%u0301ry 2011).
One of the reasons why subprime abused was due to deregulation. Because of this, banks gave mortgages to non-credit worthy consumers that greater increased the rate of defaulters. The reason why banks undertook this unreasonable risky venture was due to the lack of the minimum capital. In addition, there were no regulations requiring banks to meet this crucial requirement. This made some banks have as little a minimum capital as less that 2% of their balance sheets. This made banks be over adventurers bearing in mind that they did not have much or anything to lose (Apel 2003).
Some of the over adventurers and risky investments that were taken by banks included amassing large amounts of money in one meticulous asset class. A good example in which the European banks gambled with the people’s money included the enormous investment they had made in the American mortgage and asset investments. In some of these activities, the policy maker did not do much to caution people, but they encouraged these activities to proceed. The policy makers did not play their role in evaluating risks of such investments. Banks ended up using the resent trends of these investments that were unrevealing and misleading. They were not able to foresee the effects of subprime lending and the sovereign dept (Underhill 2010).
As some people discovered this foul play by banks, they ran for the government bonds thinking that they were safe. The overall effect of this was the collapse of the banks forcing the policy makers to intervene in with help. People had to invest their money in the places that considered being safe (Della and Tallani 2011).
One of those safe investments according to the public and investors was the European sovereign debt; these bonds were considered risk free. They were exceptionally attractive for the people at that time, as banks were then in the midst of the crisis. However, there was no regulation of these bonds, the governments borrowed more than they could pay. Some of the nations that had borrowed from the public became officially unable to service their loans. Some of the economies in this zone had become turbulent, as investors were still keen to buy the bonds oblivious of the eminent risk. The problem in both cases is that risks were directly or indirectly passed to the taxpayers (Apel 2003).
For years, people have believed that the government dept is the safest form of investment; governments are seen as having many ways to repay their loans. The same case occurred to the Eurozone as investors were more than willing to lend to the government after the storm experienced by the banks. European sovereign debt made the investors lose their money as various parties became unable to repay. The failure of these governments to repay had truly far-reaching consequences to the whole economies.
The leaders of this zone convened to find solutions to the problems facing this zone and its economic stability. The initial step was to provide support for the countries most affected by the crises. The above overall goal was supposed to be achieved through several ways that were identified and discussed in details. Loans were provided for countries such as Greece that was crucial to assist this economy regain its stability. Eurozone also found a need to better terms of the support fund that was also meant to assist the nations deal with the crisis (Della and Tallani 2011).
The zone also carried out radical reforms in the bank system as the governments were supposed to guarantee banks that had been affected by the sovereign dept crises. There were steps to ensure that various banks were able to provide loans that were necessary for job provision and growth. Other measures were taken to ensure effective regulation of banks to maintain a capital base of at least 9% of the balance sheet. This was to ensure that banks took responsible choices when it came to the issues of investment (Apel 2003).
Recapitalization of the banking system was found to be necessary. In this measure, banks are required to utilize the private sources of capital and turn to the government only as a last resort. This will reduce the instances of government borrowing. This appears exceedingly attractive and lead to economy being left with little money for private investment.
Because of the crises, the Eurozone countries collectively permitted actions to advance the economic governance in an attempt to effect regulation. This was achieved by the effective harmonization of economic, as well as financial planning policies of the various nations. This step was to be used alongside the increased monitoring with the aim of ensuring that all the above measures are well implemented (Allen and Alphande%u0301ry 2011).
The member states of this economic zone also recommended closer integration of their economies. There were actual implementations of the steps to ensure that this region achieves even a greater economic integration in terms of borrowing and investment among others.