Ap Euro Case Study

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1. Is Europe an optimum currency area?
While Europe all together is not an optimum currency area, the European Union is. This is because only the countries that make up the European Union share a single currency, the euro. This leads to greater economic benefit in the countries that make up the union than there is in one remaining an independent country. However, there are European countries that are not members of the European Union, such as Great Britain or Russia. These countries are not considered to be part of the optimum currency area because they do not use the euro and do not follow other rules set by the European Union involving trade and travel. This creates exchange problems in commerce and limits the flow of workers and tourists.
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Similar to conditions in the United States, at this time, many banks in Europe to realize that they may have overleveraged themselves. This caused the leadership to start looking for a solution to this problem. At the same time, these banks did not want to decrease their lending abilities with higher interest rates. Because of this, many European banks started suffering extreme losses on loans defaulting, particularly in the housing industry, causing some of even the biggest banks to fail. This led many of these banks to begin requesting bailouts and reimbursements for losses they took from their respective governments which in turn looked to the International Monetary Fund to bailout the governments. One example of this is the failure of the Icelandic bank Landsbanki. When Landsbanki’s “Icesave” program failed in October 2008, thousands of English investors were left with their accounts empty. Additionally, malicious overlending was rampant in nearly all the worlds’ largest banks, not just Europe. However, banking was not the only factor in the crisis. The poor financial dealings of some countries caused problems in 2009, when the bubble finally burst, both these debtor countries, like Greece, and lender countries, such as Germany, began to realize that defaulting on governmental debts was an option. This bubble effect across all of Europe caused the major …show more content…
The crash of the housing market in Spain, poor financial leadership in Greece, and other financial disasters in countries like Portugal and Ireland contributed to the terrible economic conditions; however, the overarching event that can be tied to every other is the failure of member countries to abide by the rules on borrowing. Many countries, like Greece, borrowed much more from other European countries, particularly Germany, than they could afford to pay back. In 2009, when the countries of the European Union first realized that it was possible for countries to default on their debt, the entire sovereignty of the European Union was at risk. If a country was allowed to default on millions of euros worth of debt with no repercussions, what would that mean for the rest of the European Union? The central leaders of the EU looked to third party organizations to bail out these countries who could not refinance their debt and were therefore left with no other option than to

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