Introduction The Financial Crisis began during September 2008, the fallof the Lehman Brothers Bank caught the world by surprise, it led to the banksbeing seen as unreliable and thus caused a ripple around the world that causedthe worlds financial institution to shatter. The Financial Crisis showed theworld that the financial institutions are not the most secure places to holdmoney, the dropping of the Lehman Brothers Bank made that very apparent to theworld. There are many roots of the Financial Crisis, many peoplearound the world feel that it was the generous lending of banks to consumers inAmerica, lending to ‘subprime’ borrowers with poor credit history.
Buying andowning a home is part of the ‘American dream’ and when the option, in the early2000’s, of mortgages at a lower interest rate became available, many first timebuyers, subprime borrowers, multiple homeowners were attracted to thesemortgage’s. With a lot of consumers buying into property, house prices startedto rise and consumers that had purchased ARM’s (Adjustable rate mortgages)began to suffer, as they couldn’t afford to pay their increasing mortgagepayments. ARM’s for the first few years have a consistent interest rate, whichsteadily begins to increase and some lenders who may have been subprimecouldn’t cope and, consequently, default of their payments.
When peopledefaulted, there became more houses for sale on the market, however there was afall in buyers in the market, therefore causing a surplus in supply of houses,leading to a fall in house prices as supplyoutpaced demand. For some borrowers they had a mortgage for more thantheir house was actually worth, thus they stopped paying their mortgage asthere was virtually no incentive to pay for a property that was worth a marketvalue of incredibly less than they borrowed. Many lenders started to receiveless and less on their investments and then started to lose money on theirinvestment. When investors started to lose their investments the housing systemcollapsed on itself and the financial crash quickly followed as investorsquickly pulled out of American markets. Another reason for the Financial crash is that, Banks wouldsell these loans on to third parties, through their financial products such asCDO’s and mortgage backed securities.
The creation of these financial products appealedto investors as they were presented as risk free investments (banding AAA to BB),investors invested and thought that AAA was the safest investment for them andBB was the riskiest. Pension funds and investors had invested in thesefinancial products as they were presented as risk free and that they wouldguarantee a return on their investments. However, they didn’t know that;Lenders, Investment banks and Credit Rating agencies all became lazy and caredmore about selling on the debt and making a profit, regardless of the amount ofrisk the debt carried. The ‘Big 3’credit rating agencies Standard & Poor, Moody’s, and Fitch, at the weremarket monopolies, having a combined market share of roughly 95%, and thuscreating an overreliance on these credit rating agencies. When they providedtheir seal of approval to investors, regarding the risk of CDO’s and Mortgagebacked securitises, they practically allowed the housing crisis to unfold,leading to the financial crash of 2008.
In this essay, I am to explore and compare thevarying levels of difficulties that both Greece and Germany experienced duringthe period of the Financial Crisis, and look in great detail what happenedbefore the Crisis, what happened during the crisis and consider theaftereffects the crisis created (both positive and negative). Problems in Greece Advantages of joining the EU include; reductions in businesscosts; greater business efficiencies; greater competition (which can bebeneficial for both consumers and producers); no tariffs on goods on bothexports and imports have to be paid by member countries; people are able tomove to member countries freely, these are few of the many advantages of beingin the EU. Greece saw these advantages and was instantly appealed to theunification of EU. On the 1st January 1981,Greece joined the EU. Much later, on the 1st January 2001, Greeceadopted the Euro along with adopting it gave many benefits not only for Greecebut Europe as a whole, making the union of the countries more closer. At the time being part of the euro was hugely popular in Greece, withpolls implying that nearly two-thirds of the population are in favour of themove. Greece, at the time, couldn’t the first wave of countriesin 1999, as they didn’t meet the requirements to join the Euro, specificallythe low inflation and low government debt and deficits. They were the 12thand the last country to join the euro and many countries were very hesitantabout Greece joining the Eurozone as they couldn’t maintain a low inflation,even the president of the European Central Bank at the time, WimDuisenberg, warned that Greece had much to do in terms of improving its economyand controlling inflation, at the time inflation in Greece was an unacceptablyhigh 4%.
. The countries adopting the Euro have a chance to startafresh as the plan was that a united currency would make it easier to tradewith countries in EU through the removal of trade barriers. When Greece tookthe euro as their currency they experienced a boom in their nominal GDP percapita, they felt more closer with Europe and, to this very date, have reliedheavily on trade with surrounding countries such as Germany, Italy, France andSpain and the united currency has made trade significantly easier with thosecountries.
Another advantage of joining the Euro for Greece was thatthey were able to borrow money from investors at lower interest rates, asinvestors were under the assumption that if Greece were unable to pay the loansoff other countries such as France and Germany would come to the aid of theirpartner nation. Greece took advantage of this by borrowing money, by using thepower and backing of Germany, Greece spent investors’ money with little care ofreturning their investment. Investors have invested with the intention that ifGreece cannot afford to pay their money back then the other countries in theEuro can help Greece to pay back the money. But with Greece’s big publicspending and loose rules on tax collection it would be near impossible to getinvestors their money back from Greece. So what happened to Greece during the Financial Crisis of2008? For the past decade Greece kept their spending increasingly high, forreasons unbeknownst to most sane countries. So when the financial crisis camealong, they were unprepared for the effects it would create. In 2008, theEuropean Central Bank raised their interest rates to 4.25%, this lead to an increasein private debt and deficits increased.
Greece was in a position where it couldn’t devalue its currency orreduce interest rates to stimulate economic growth, by being part of the singlecurrency and being the poorest and the most indebt the monetary policy decidedby the European Central Bank didn’t help a country like Greece but helpedcountries like France and Germany. Greece were also very heavily dependant of loans frominvestors but when the Financial Crisis hit, investors were very hesitant andmany refused to lend to countries like Greece and therefore raised the interestrates on the loans if they did lend money. The IMF and the Euro funded Greecethrough bailouts, altogether 3 bailouts, the first in May2010 a €110 billion bailout loan, second in February 2012 a €130 billion and athird in August 2015 €86 billion, placing total debt at €326 billion.However, the bailouts came with conditions and strict terms, which include 14austerity measures that contributed to a reduction in Greece’s economy duringsix years of recession and leading to unemployment rising to record levels ofalmost 28%. Some of the austerity measures include pay cuts/ pay freeze for allgovernment workers, also including job cuts with public sector workers.
Anotherausterity measure would be to stop early retirement and a rise from 37 to 40minimums of years needed to work to qualify for a full pension. Privatisationis another austerity measure that will be increased, in order to do thissufficient growth will need to be achieved in the private sector and possiblyprivatisation of some sectors. Reasons for doing this is to reduce the relianceof the Greek economy on the public sector and thus cutting the number of peopleon the public payroll. By doing this they would be cutting public expendituresand thus needing less money to spend on governmental services this would slowdown the rate of the amount of debt currently being accumulated by the Greecepublic spending.
Protesters in Greece blamed Germany for imposing fiscalausterity, occasionally likening Germany’s Chancellor Merkel to Hitler. The reasons behind the financial crisis negatively affectingGreece a lot include the fact that Greece altered their statistics by totally transformingits figures in order to be part of the Eurozone. Concealing theirfigures and ‘cooking’ their books in order to join the Euro, gave the countriesin the Euro the wrong idea of the Greece economy. The Budget deficit figures(according to Greece financial minister, 2004) were altered at the time, it wasa requirement in order to join the Euro budget deficits should be below 3% ofGDP, however Greek press reports suggest thecountry’s budget deficit in 1999 was 3.38%. Yiannos Papantoniou Minister of Economy and Finance,reassured the world that they weren’t going to fiddle with the statistics inorder to join the Euro, but when the Greece Press did an investigation in tothis matter, in actuality that’s exactly what they did. Another reason for the financial crisis negatively affectingGreece is that it had led to Greece having a very high government debt(approximately 180.8% of GDP, 2016), and to pay off this debt tax collectionrevenues have been consistently low in Greece, the enforcement of the law ontax has been very loose and is one of the biggest contributors to why Greece isunable to pay off its debts.
Hosting the Olympicscost Greece approximately €9 billion (€11 billion in today’s rate), followed byincrease in public spending, was not backed up by a sufficient level of taxrevenues needed to be raised. By living beyond their means, oneof the main troubles was the level of corruption and tax evasion occurring thiswas leading to big governmental budget deficits. Tax evasion has, inessence, become a way of life not to pay taxes and would be out of the norm ifyou do pay, many citizens do not pay taxes as they don’t see the effects it makesto their standard of living. Corruptionis very high in Greece and therefore citizens would prefer to pay bribesinstead of taxes.
For example;people, in the prosperous and affluent area of Ekali, checked the box on theirannual returns had owned up to having a pool. Tax inspectors were suspicious ofthis number and launched their own investigation and discovered there were inactuality 16,974 swimming pools in that district. Another tax investigation wasthat doctors were declaring small amounts of incomes, but were living lavishlifestyles, far beyond the means they had declared.
Government debt, European Commission Asocio-economic effect of the negative decisions during the financial crisis hasbeen austerity. Austerity by definition is Difficult economic conditions created by government measuresto reduce public expenditure. But really it has caused a brutalcircle of recession. The continuous drop in GDP and lower productionhas led to loss of thousands of jobs, further causing recession.Unemployment hadalready more than doubled within the first three years of austerity and reachedits peak of 28% in 2013.
The highest unemployment rate of 39.5% (2017)was the 15-24-age range, while thousands of jobs have been lost underconditions of inadequate social protection and fall of labour demand. Suicideshit record levels, research shows a 35% jump in suicide ratesduring the first two years of austerity programs, withresearchers linking every suicide to unemployment. Highly educated younger peopleare migrating to other countries causing an affect known as ‘brain drain’.Family owned enterprises, consisting of small and medium sized businesses areclosing down. Morethan 65,000 of them closed down in 2010 alone, resulting in a “clearance” ofmedium and small enterprises and estranging the people dependent on them.
Homelessnessincreased during the period of 2009-2011 by 25% and has increased further topresent day. Public health has fallen depression rate have increased from 3.3% to 8.2% between 2008 and 2011.
Tocounter the problems of austerity, Greece has elected Syrizia government led byAlexis Tsipras- and his main aim is to end austerity Germany and the financial crisis Germany had their own, very different, version of how thefinancial crisis affected them, with Chancellor Merkel leading them in acoalition government. Germany was one of the hardest hit economies by thefinancial crisis; this was due to their strong dependence on exports. However,despite the slumps in global financial markets, for the past 20-22 years,Germany has been running a positive trade in balance, as of 2016, $273 billionin net exports. In Germany, the crisis was transferred through trade. The firstaffects of the Global Financial Crisis were first seen and evident when, in2009, there was a steep decline in exports. However, Germany was able to mounta strong recovery and increased their trade amount in USD. Blue line- Exports Red line- Imports To explore the Germans response to the recent Global FinancialCrisis of 2008, its vital to look at the crises they have experienced in thepast, and how those experiences have taught them vital lessons about how topull an economy through a crisis.
In 1923, a crisis began in Germany, when they misseda reparations payment, which they were ordered to pay after the failures of WorldWar 1. This condition ascended out of control and once again the German peoplewere extremely unhappy and in financial difficulty, this consequently led touprisings occurring throughout the country. The sudden flood of papermoney into the economy, on top of the general strike across Germany – which meant fall in goodsbeing manufactured. Thus, there was more money that was paying for fewer goodsand services – combined with a weak economy that was ruined by the war, allresulted in hyperinflation. This led to prices running and spiralling out of control and the German currencybecoming practically worthless. The German government decided to ditch thePapiermark and form the new Retenmark, its value was the same as 1 trillionPapiermark. Germany learnt from this experience, and it’s had an impact on how theystructuralise their monetary policy and their priority, in a crisis, tomaintain a stable currency.
Before thefinancial crisis, Germany, in the early 2000s, embraced a pro-growthdeficit-reduction course alongside structural labour market reforms. It decreasedincome taxes to lead to further growth and employed critical labour marketreforms in order to improve boost industrial productivity and increase workincentives. To decrease the cost of the public pension program, it increasedthe age for retirement. As well as getting rid early retirement clauses andchanged the way it calculates pension payments. Germany also adopted cuts to public-sectorpay and reduced subsidies for specific industries that they thought didn’t needtheir extra funding. In the build up to the financial Crisis, these decisionsthat were made built the strong foundations that meant that Germany was aboutto cope when faced with economic downturn that was heavily exposed to Europe.Economies that followed this model/guidelines and kept their budgets in orderbefore the Financial Crash of ’07-’08, arose in a better condition thatcountries such as Greece that kept spending recklessly highShort-term sacrifices were extremely necessary for thelong-term success, the sacrifices; Germany’s Eurozone partners did not partakein. These sacrifices include strict wage control, a retirement age rising to 67 from 65,lower welfare payments and eased hiring and firing all, all of these sacrificesled to German products being more competitive and further helped the countryoutperform its Eurozone partners who were suffering in their debt-fuelledconsumption.
Germans steered clear of the debt-fuelled consumption boom thatmany believe contributed to the financial crisis, they felt that spending andborrowing would not be the way to beat this Financial Crisis. During the recession, Chancellor Angela Merkel resisted the temptation of spending their wayout of the Financial Crisis, which their European partners in the Eurozone feltwas crucial to restoring growth. When the Financial Crisis hit Germany,the German Chancellor Merkel preferred an austerity driven Europe and Germany,for decades policy makers have preached austerity and structural labour marketchanges as a model for other European countries to lead to furthercompetitiveness, boost growth and increase employment. Germany’s plan was to keep their exports high and funded programmes tokeep workers employed (they decreased unemployment benefits so more people werein employment, this step was taken at the prime of the crisis) , by doing thisthey ensured that they exported their way to growth through producing goodsthat major economies around the world needed such a cars, machinery andtechnology related goods.
Germanywas able to mount a strong recovery, which was to a large extent created bytrade. The majority of trade during this period was with non-EU countries suchas China. Sowhat were the affects of the Financial Crisis on Germany? In the years beforethe financial crisis, prices of houses in Germany were stagnant and had notbeen of particular interests to overseas investors. However, along came thefinancial crisis and an unintended effect occurred in the real estate ofGermany. Overseas investors perceived German real estate as a ‘safe haven’ in atime of economic uncertainty and low interest rates.
German workers may also be more willing to buyhouses, as they would have kept their jobs during the crisis and even received incrementsin wages after the financial crisis. In 2009 price index for houses fell by1.9%, however in 2010, (2010,the country was broadly seen as having recovered from the crisis, experiencingGDP growth and falling unemployment) prices bounced back and raised by 3.6% currently Germany’s houseprices are raising in value. This was an unintended affect of the financialcrisis but one which has greatly helped Germany and is one which to this dayattracts immigration, investment and, possibly, tourism to Germany bringingrevenue stream to Germany and further building their economy and making them astronger nation.
Another effect of the Financial Crisis, the debt crisis triggeredan arrival of skilled immigrants, this is a inverse to ‘brain drain’ also knownas ‘brain gain’, from crisis-ridden countries after long shortages of skilledlabour in the country’s manufacturing sector. This is a surprising affect givenGermanys reputation as a country that is not overtly welcoming to immigrantsfrom other nations. However this was a very obvious affect, skilled andunskilled workers were attracted to Germany’s export driven growth and German’sattitude to employment (the fact they want more people employed rather thancalming unemployment benefits). Greece a country that was suffering with severeunemployment suffered a ‘brain drain’, and thus migrated to countries such asGermany that there are a range of employment opportunities and financialstability.