The afford to pay their increasing mortgage payments. ARM’s

The Financial Crisis began during September 2008, the fall of the
Lehman Brothers Bank caught the world by surprised, it leads to the banks being
seen as unreliable and thus caused a ripple around the world that caused the
world financial institution to shatter. The Financial Crisis showed the world
that the financial institutions are not the most secure places to hold money,
the falling of the Lehman Brothers Bank made that very apparent.


There are many roots of the Financial Crisis, many people around the
world feel that it was the generous lending of banks to consumers in America,
lending to ‘subprime’ borrowers with poor credit history. Buying and owning a
home is part of the ‘American dream’ and when the option, in the early 2000’s,
of mortgages at a lower interest rate became available, many first time buyers,
subprime borrowers, multiple homeowners were attracted to these mortgage’s. With
a lot of consumers buying into property, house prices started to rise and
consumers that had purchased ARM’s (Adjustable rate mortgages) began to suffer,
as they couldn’t afford to pay their increasing mortgage payments. ARM’s for
the first few years have a consistent interest rate, which steadily begins to
increase and some lenders who may have been subprime couldn’t cope and, consequently,
default of their payments. When people defaulted, there became more houses for
sale on the market, however there was a fall in buyers in the market, therefore
causing a surplus in supply of houses, leading to a fall in house prices as supply outpaced demand. For some borrowers they
had a mortgage for more than their house was actually worth, thus they stopped
paying their mortgage as there was virtually no incentive to pay for a property
that was worth a market value of incredibly less than they borrowed. Many
lenders started to receive less and less on their investments and then started
to lose money on their investment. When investors started to lose their
investments the housing system collapsed on itself and the financial crash
quickly followed as investors quickly pulled out of American markets. 

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Another reason for the Financial crash is that, Banks would sell these
loans on to third parties, through their financial products such as CDO’s and
mortgage backed securities. The creation of these financial products appealed
to 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
and BB was the riskiest. Pension funds and investors had invested in these financial
products as they were presented as risk free and that they would guarantee a
return on their investments. However, they didn’t know that; Lenders,
Investment banks and Credit Rating agencies all became lazy and cared more
about selling on the debt and making a profit, regardless of the amount of risk
the debt carried.  The ‘Big 3’ credit
rating agencies Standard &
Poor, Moody’s, and Fitch, at the were market monopolies, having a combined
market share of roughly 95%, and thus creating an overreliance on these credit
rating agencies. When they provided their seal of approval to investors,
regarding the risk of CDO’s and Mortgage backed securitises, they practically
allowed the housing crisis to unfold, leading to the financial crash of 2008.


Problems in Greece


Advantages of joining the EU include; reductions in business
costs; greater business efficiencies; greater competition (which can be
beneficial for both consumers and producers); no tariffs on goods on both
exports and imports have to be paid by member countries; people are able to
move to member countries freely, these are few of the many advantages of being
in the EU. Greece saw these advantages and was instantly appealed to the
unification of EU. On the 1st January 1981,Greece joined the EU.


Much later, on the 1st January 2001, Greece
adopted the Euro along with adopting it gave many benefits not only for Greece
but 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, with polls implying that nearly
two-thirds of the population are in favour of the move. Greece, at the time, couldn’t
the first wave of countries in 1999 as they didn’t meet the requirements to
join the Euro, specifically the low inflation and low government debt and
deficits. They were the 12th and the last country to join the
euro and many countries were very hesitant about Greece joining the Eurozone as
they couldn’t maintain a low inflation, even the president of the
European Central Bank at the time, Wim Duisenberg, warned that Greece had much
to do in terms of improving its economy and controlling inflation, at the time
inflation in Greece was an unacceptably high 4%..


The countries adopting the Euro have a chance to start
afresh as the plan was that a united currency would make it easier to trade
with countries in EU through the removal of trade barriers. When Greece took
the euro as their currency they experienced a boom in their nominal GDP per
capita, they felt more closer with Europe and, to this very date, have relied
heavily on trade with surrounding countries such as Germany, Italy, France and
Spain and the united currency has made trade significantly easier with those


Another advantage of joining the Euro for Greece was that they
were able to borrow money from investors at lower interest rates, as investors
were under the assumption that if Greece were unable to pay the loans off other
countries such as France and Germany would come to the aid of their partner
nation. Greece took advantage of this by borrowing money, by using the power
and backing of Germany, Greece spent investors’ money with little care of
returning their investment. Investors have invested with the intention that if
Greece cannot afford to pay their money back then the other countries in the
Euro can help Greece to pay back the money. But with Greece’s big public
spending and loose rules on tax collection it would be near impossible to get
investors their money back from Greece.


So what happened to Greece during the Financial Crisis of
2008? For the past decade Greece kept their spending increasingly high , for
reasons unbeknownst to most sane countries. So when the financial crisis came
along, they were unprepared for the effects it would create. In 2008, the
European Central Bank  raised their
interest rates to 4.25%, this lead to an increase in private debt and deficits
increased.  Greece was in a position
where it couldn’t devalue its currency or reduce interest rates to stimulate
economic growth, by being part of the single currency and being the poorest and
the most indebt the monetary policy decided by the European Central Bank didn’t
help a country like Greece but helped countries like France and Germany.


Greece were also very heavily dependant of loans from investors but
when the Financial Crisis hit, investors were very hesitant and many refused to
lend to countries like Greece and therefore raised the interest rates on the
loans if they did lend money. There have been 3,  the
first in May 2010 a €110 billion bailout loan, second in February 2012 a €130
billion and a third in August 2015 €86 billion, placing total debt at €326

However, the bailouts came with conditions and strict terms, which include 14
austerity measures that contributed to a reduction in Greece’s economy during
six years of recession and leading to unemployment rising to record levels of
almost 28%. Some of the austerity measures include pay cuts/ pay freeze for all
government workers, also including job cuts with public sector workers. Another
austerity measure would be to stop early retirement and a rise from 37 to 40
minimums of years needed to work to qualify for a full pension. Privatisation
is another austerity measure that will be increased, in order to do this sufficient
growth will need to be achieved in the private sector and possibly
privatisation of some sectors. Reasons for doing this is to reduce the reliance
of the Greek economy on the public sector and thus cutting the number of people
on the public payroll. By doing this they would be cutting public expenditures
and thus needing less money to spend on governmental services this would slow
down the rate of the amount of debt currently being accumulated by the Greece
public spending. Protesters in Greece blamed Germany for imposing fiscal
austerity, occasionally likening Germany’s Chancellor Merkel to Hitler.


The reasons behind the financial crisis negatively affecting Greece a
lot include the fact that Greece altered their statistics by totally transforming its figures in order
to be part of the Eurozone. Concealing their figures and ‘cooking’ their books
in order to join the Euro, gave the countries in 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 was a requirement in order to join
the Euro budget deficits should be below 3% of GDP, however Greek press reports suggest the country’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 in order to join the Euro, but
 when the Greece Press did an
investigation in to this matter, in actuality that’s exactly what they did.


Another reason for the financial crisis negatively affecting
Greece 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 collection
revenues have been consistently low in Greece, the enforcement of the law on
tax has been very loose and is one of the biggest contributors to why Greece is
unable to pay off its debts. Hosting the Olympics cost Greece approximately
€9 billion (€11 billion in today’s rate), followed by increase in public
spending, was not backed up by a sufficient level of tax revenues needed to be
raised. By living beyond their means, one of the main
troubles was the level of corruption and tax evasion occurring this was leading
to big governmental budget deficits. Tax evasion has ,in essence, become
a way of life not to pay taxes and would be out of the norm if you do pay, many
citizens do not pay taxes as they don’t see the effects it makes to their
standard of living.  Corruption is very
high in Greece and therefore citizens would prefer to pay bribes instead of

For example; people, in the prosperous and affluent area of Ekali, checked the
box on their annual returns had owned up to having a pool. Tax inspectors were
suspicious of this number and launched their own investigation and discovered
there were in actuality 16,974 swimming pools in that district. Another tax
investigation was that doctors were declaring small amounts of incomes, but
were living lavish lifestyles, far beyond the means they had declared.


Government debt, European Commission


socio-economic effect of the negative decisions during the financial crisis has
been austerity. Austerity by definition is Difficult economic conditions created by government measures
to reduce public expenditure. But really it has caused a brutal circle of recession. The continuous drop in GDP
and lower production has led to loss of thousands of jobs, further causing
recession. Unemployment had already more than doubled within
the first three years of austerity and reached its 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
under conditions of inadequate social protection and fall of labour demand.

Suicides hit record levels,  research shows a 35% jump in suicide rates  during the first two years of
austerity programs, with researchers linking every suicide to unemployment.

Highly educated younger people are migrating to other countries causing an
affect known as ‘brain drain’. Family owned enterprises, consisting of small
and medium sized businesses are closing down. More than 65,000 of them
closed down in 2010 alone, resulting in a “clearance” of medium and small
enterprises and estranging the people dependent on them. Homelessness increased
during the period of 2009-2011 by 25% and has increased further to present day.

Public health has fallen depression rate  have increased from 3.3% to 8.2% between 2008
and 2011. To counter the problems of austerity, Greece has elected Syrizia
government led by Alexis Tsipras- and his main aim is to end austerity












Germany and the financial crisis


Germany had their own, very different, version of how the
financial crisis affected them, with Chancellor Merkel leading them in a
coalition government. Germany was one of the hardest hit economies by the
financial 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 billion
in net exports.

Blue line- Exports

Red line- Imports


To explore the Germans response to the recent Global
Financial Crisis of 2008, its vital to look at the crises they have experienced
in the past, and how those experiences have taught them vital lessons about how
to pull an economy through a crisis. In 1923, a  crisis began when
Germany missed a reparations payment after the failure of WW1. This condition
ascended out of control and once again the German people were unhappy and in
financial difficulty, so uprisings occurred throughout the country. The sudden flood of paper
money into the economy, on top of the general strike across Germany – which meant fall in goods
being manufactured. Thus, there was more money, chasing fewer goods – combined
with a weak economy ruined by the war, all resulted in hyperinflation. This led to prices running out of control and the German currency becoming
practically worthless. The German government decided to ditch the Papiermark
and form the new Retenmark, its value was the same as 1 trillion Papiermark.

Germany learnt from this experience, and it’s had an impact on how they
structuralise their monetary policy and their priority to maintain a stable


Before the financial crisis,
Germany, in
the early 2000s, embraced a pro-growth deficit-reduction course alongside
structural labour market reforms. It decreased income taxes to lead to further
growth and employed critical labour market reforms in order to improve boost
industrial productivity and increase work incentives. To decrease the cost of
the public pension program, it increased the age for retirement. As well as
getting rid early retirement clauses and changed the way it calculates pension
payments. Germany also adopted cuts to public-sector pay and reduced subsidies
for specific industries that they thought didn’t need their extra funding. In
the build up to the financial Crisis, these decisions that were made built the
strong foundations that meant that Germany was about to cope when faced with
economic downturn that was heavily exposed to Europe. Economies that followed
this model/guidelines and kept their budgets in order before the Financial
Crash of ’07-’08, arose in a better condition that countries such as Greece
that kept spending recklessly high.

Short-term sacrifices were extremely necessary for the
long-term success, the sacrifices,  Germany’s Eurozone partners did not partake in.

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 sacrifices led to German products
being more competitive and further helped the country outperform its Eurozone
partners who were suffering in their debt-fuelled consumption. Germans steered
clear of the debt-fuelled consumption boom that many believe contributed to the
financial crisis, they felt that spending and borrowing would not be the way to
beat this Financial Crisis. During the recession, Chancellor Angela Merkel resisted the temptation of spending their way out of
the Financial Crisis, which their European partners in the Eurozone felt was
crucial to restoring growth. Germany’s plan was to keep their exports high and
funded programmes to keep workers employed (they decreased unemployment
benefits so more people were in employment, this step was taken at the prime of
the crisis) , by doing this they ensured that they exported their way to growth
through producing goods that major economies around the world needed such a
cars, machinery and technology related goods.