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How did the recent GFC (Global Financial Crisis) affect the European Union? Elaborate with appropriate examples Essay

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    Masters
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How the recent Global Financial Crisis affected the European Union

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1.1 Scope of the financial crisis

Overall, most industrialised countries of continental Europe experienced severe economic problems because of the financial crisis, and many of them experienced an economic downturn similar to that experienced in the United States and the United Kingdom. An economic meltdown was experienced in the EU mainly because of the turmoil in financial markets, the correction in housing markets, and a dramatic rise in energy prices (Adair et al,
2009, p. 10).Countries such as Germany and France had to support their banks with government loans to forestall the consequences of the GFC (Council on Foreign Relations, 2009). As a result of the crisis, Iceland was unable to support its highly developed financial sector and was compelled to seek help from outside the country. Later, Iceland’s government collapsed as a result of political pressure related to the financial turmoil (Council on Foreign Relations, 2009).

1.2 Impacts on economic performance

1.2.1 Instabilities in financial markets

The economic performance of countries, and specifically those in Western Europe, was severely affected as a result of the GFC. According to Jackson (2009, p. 7), the International Monetary Fund released estimates of indicators of the impact of the financial crisis and economic recession on the performance of major advanced states in the year 2009. According to these estimates, economic growth was expected to slow by nearly 2 percent in 2009 to record a 0.2 percent drop in the rate of economic growth. In addition, the IMF projected that the euro area countries could experience a combined negative growth rate of 2 percent, down from an anticipated rate of growth of 1.2 percent in 2008. In deed, in February 2009 the EU announced that the rate of economic growth in the EU states in the fourth quarter of 2008 had declined to an annual rate of negative 6 percent (Jackson, 2009, p.7). Further projections of the IMF are shown in the table below.

Projections of Economic Growth in Various Countries and Areas

(Real GDP growth, in % change)

Projected

United Kingdom

World Economic Outlook, Update, the International Monetary Fund, January 2009 [cited in Jackson (2009, p.7)]

1.2.2. The housing industry

The construction industry was particularly susceptible to the recent GFC and significantly contracted between 2008 and 2010. According to the Construction Product Association (2010), overall construction activity in the United Kingdom declined for the seventh consecutive quarter in 2010 and the industry was concerned that political uncertainty could further prolong the downturn in the industry (Manase, 2010). Essentially, there were low interest rates coupled with and expansion of financial investment opportunities arising from aggressive credit expansion, a growing complexity in mortgage and securitisation and loosening in underwriting standards and expanded linkages among national financial centres to stimulate a broad expansion in credit and economic growth. This fast rate of growth caused an increase in the values of equities, commodities as well as real estate (Jackson, 2009, p. 9). Further, poor mortgage assets spurred a crisis of confidence in banks as well as property loan lenders, making it difficult for some institutions to borrow and necessitating government intervention to ease liquidity constraints (Senior Experts Group, not dated).

1.2.3. Energy prices

There was lower profitability in the energy industry due to a slump in the prices of oil and other forms of energy starting mid-2008 as a result of weak demand. There were also expectations of lower prices compared with the preceding times, which made new investments in production facilities generally less gainful as costs generally remained high. In Europe, the big drop in carbon prices shifted the relative economics of power-generating plants, to the detriment of low-carbon renewables based as well as nuclear power (International Energy Agency, 2009, p. 10). The European countries that were most affected by the slump in energy demand include France, the United Kingdom and Spain, where industrial production fell most (International Energy Agency, 2009, p. 11).

1.2.4 Low spending

In Germany, household spending declined steadily in 2008 (Adair et al,
2009, p. 10). The same scenario was witnessed in the United Kingdom, where household spending slumped to its lowest level between 2008 and 2010. There was a notable 0.6 percent decline in household spending between January and March 2010, which was the most significant drop since the second quarter of 2009 when the economy was affected by the downturn (Kollewe, 2011). The reason for the decline in levels of spending is that people were keen to save for the future, which looked uncertain as the financial downturn went on.

1.2.5 Increased unemployment

In the United Kingdom, economic activity declined sharply over the first half of 2008 and reached a standstill at the end of the second quarter. The weakening was attributed to many factors, but was fuelled mainly by a decline in both residential and business investment. Even though the United Kingdom provided some stimulus, as the financial crisis gathered momentum the previously robust labour market weakened spectacularly, leading to a significant increase in unemployment. The number of unemployed people rose by 290,000 over 2008 to reach 1.92 million, the highest figure recorded since 1997 (Adair et al,
2009, p. 11).

1.2.6 Manufacturing industries

As mentioned above, industrial production dropped in countries such as France, the United Kingdom and Spain (International Energy Agency, 2009, p. 11). Also in Germany, the exports which drove the economy were struggling. For instance, orders for German engineering dropped in June 2009 by 5 percent compared with the same period in 2008. As a result, German GDP declined by 2.1 percent, in the fourth quarter of 2008, which is the biggest drop ever recorded in the history of united Germany (Adair et al,
2009, p. 10).

References

Adair, A; Berry, J; Haran, M; Lloyd, G & McGreal, S 2009, “The Global Financial Crisis: Impact on Property Markets in the UK and Ireland,” Report by the University of Ulster Real Estate Initiative Research Team, March 2009, Available from http://news.ulster.ac.uk/podcasts/ReiGlobalCrisis.pdf

Council on Foreign Relations 2009, “Issue Guide: Western Europe and the Global Financial Crisis,” May 2009, Available from http://www.cfr.org/economics/issue-guide-western-europe-global-financial-crisis/p19525
(14 September 2011).

European Commission 2009, “Economic Crisis in Europe: Causes, Consequences and Responses,”
European Economy, July 2009, http://ec.europa.eu/economy_finance/publications/publication15887_en.pdf
(15 September 2011).

International Energy Agency 2009, IEA Background paper for the G8 Energy Ministers’ Meeting 24-25 May 2009 “The impact of the financial and economic crisis on global energy investment,” OECD/IEA 2009, Available from http://www.iea.org/ebc/files/impact.pdf (15 September 2011).

Jackson, J K 2009, “The Financial Crisis: Impact on and Response by The European Union,” Congressional Research Service, Available from
http://www.fas.org/sgp/crs/misc/R40415.pdf (15 September 2011).

Kollewe, J, 2011, “UK household spending slumps to near two-year low,” The Guardian (Wednesday 25 May 2011), Available from http://www.guardian.co.uk/business/2011/may/25/uk-household-spending-slumps-low (15 September 2011).

Manase, D 2010, “The impact of the global financial crisis on client procurement behaviour in the UK construction industry: — the case of PFI,” Glasgow Caledonian University, Available from
http://www.rics.org/site/download_feed.aspx?fileID=8072&fileExtension=PDF
(15 September 2011).

Senior Experts Group, not dated, “The EU and the Global Financial Crisis,” European Movement, Available from
http://www.euromove.org.uk/fileadmin/files_euromove/downloads/SEG_briefing_-_the_EU_and_the_Financial_Crisis.pdf
(15 September 2011).