Can eu stand the current economic crisis?

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|DEn haag university |
|Can the European Union Stand the Current Economic Crisis? |
|EU 3.12|
| |
|David Champenois - 08054088 |

| |

Can the European Union Stand the Current Economic Crisis?

Nowadays, we are facing a world financial and economical crisis. We have seen those last months the failure of famous banks what could not havebeen imagined sooner and also the launching of action plan of a value of more than 50 billion of dollar. But how did we end up like that? It would be interesting to understand the mechanisms of this crisis and what can be done to limit the damages.

Origins of the crisis

Since July 2007, the world economy has been through 4 major steps, 4 successive types of crisis. This part is devoted tothe comprehension of this complex phenomenon.

1. The financial crisis

The financial crisis, usually called the subprime mortgage crisis has been the starting point of the all problem.

Normally when you want to take out a loan, the maximum amount that may be loaned is linked with your wage. But to boost the consumption, the American banks have offered a new kind of loan that has beencreated for the households with a low repayment capacity. This mortgage has two particularities. The first one is that the first year, you benefit of a very low interest rate that will become variable the next years. The second particularity is that the house is taken as a guarantee for the bank that has the right to sell it if you aren’t able to repay it.

The problems appeared in July 2009 withthe bursting of the United States housing bubble and the increasing of the key rate that had a direct influence on the costs of the mortgages. More and more households weren’t able anymore to repay the banks and they had to sell their houses. The banks saddled with a lot of houses that precisely lost a lot of value and that nobody was able to buy. The banks that often resorted to these subprimemortgages were finally out of liquidity because an important part of its financial resources was frozen in the estate sector.

2. The banking crisis

The expanding from a financial crisis into a banking crisis comes from a second error of the banks. To limit the risks of this new kind of credits, the banks used the securitization. Indeed they transformed this credits into securities on thestock market. Financial products like ABS ("asset backed securities"), CDO ("collateralized debt obligations") and SIV ("Special investment vehicles") were integrated in unit trusts that normally should have been safe. Quickly a tremendous amount of investors were in possession of one of these potentially dangerous financial products without knowing it.

Most banks were in possession of thosesecurities that had lost all their value with the subprime crisis but it was difficult to estimate the amount of money invested. This was the starting point of the trust loss in the interbank sector because everybody had a certain percentage of money invested in these 3 financial products (ABS, CDO and SIV) but nobody knew how much.

You have to know that usually the flow between the deposits to...