Lyn Klein
Economics for Global Managers
Professor Victoria Vernon
Module 3 Case Study: European Union
7/3/14

The EU is facing a banking crisis. There are insolvent banks in Ireland and Spain, as well as other nations. They lent out too much money, often against real estate. There were real estate bubbles then the value of real estate fell and borrowers could not always pay back the loans. The Greek banking crisis was caused by the government spending too much and borrowing too much money. The economy collapsed causing the banks to be insolvent. Before the collapse banking was conservative.
When a nation has insolvent banks belonging to the Euro zone make that problem much worse. There were silent funs on Greek banks, with capital flight; people are pulling their money out of the Greek banks and sending it elsewhere, making the Greek economy worse. The common currency zone escalates the problems.
There are also capital and trade imbalances. Germany is exporting a great deal more than it imports, causing capital flows into Germany. Spain and Greece import more than they export so capital flow is out of the country. They need to become more productive at exporting, which is not always easy.
In the 2000’s money flowed into periphery countries, borrowing rates were low and capital inflow brought rising standards of living. By 2010’s money was flowing out of the periphery countries and back into Northern Europe. Periphery economies were starved for investment borrowing at high rates. The problems are made worse by belonging to a common currency area. There is no exchange rate to adjust.
The fiscal crisis came about because some governments in the Euro zone have run up bills that now need to be repaid. They spent more money than they have been taking in, in terms of tax revenue. Greece’s band spending behavior was the upfront problem that led to