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Europe's Financial Crisis – Can They Pull Through?

The European Union has started to face difficult financial times. Europe’s financial conditions have been caused by a combination of poor policies and increased strain on the EU’s banking networks. Although the European Central Bank pays significant subsidies to the Eurozone’s banking system to help keep it running, the economic conditions continue to deteriorate. Investment banking has become almost non-profitable, and excessive laws and regulations hinder the banking industry’s profitability.

Negative interest rate policy:

The European Central Bank's negative interest rate policy is shrinking profit margins. In addition to negative rates, the ECB also charges a fine of 0.4% on certain types of deposits. The lending margins that have resulted from this policy are paper-thin, causing investors to pull back, further accelerating the current economic demise. This policy has had such a significant impact on growth that it has affected bond yields.

Debt Equals Fiat Money Creation:

Countries continuously print money to control the inflation rate whenever it is needed. However, the problem with this model is that debt quickly becomes a major economic problem. Since the Lehman Crisis, the Eurozone’s debt has increased by about €3.1 trillion in total. But the major problem here is that the EU has only printed about €2.8 trillion, which is significantly less than the total debt.

This makes 10 years bonds (which yield 2.55% per year) worthless. Currently, this condition is not as dangerous as it could be. This is mostly because asset prices have also increased accordingly. Furthermore, the global economy’s recent rapid expansion has also increased the Euro's value. With the fiat bubble increasing, a credit crisis could become a nightmare.

Recession In The Global Economy:

However, the problem exists beyond the Eurozone. The global economy, after a short spell of growth, is also heading towards a recession. Global economic conditions are one of the main reasons for the EU's current downtime.

All of this provides justification for the current situation to some extent. However, the situation is expanding at an alarming rate. Global economic problems are out of the hands of the ECB and other European policymakers. Most EU policymakers appear unaware of the upcoming threat. Unfortunately untimely decisions may very well prove to be counterproductive.

Perception Management:

To manage a big economic crisis and to absorb its effects, EU policy makers must maintain the perception that asset prices are constantly increasing. So far, this has been working as a method of regulating the EU’s financial situation.

One other factor that has kept the EU intact is the purchasing power of the Euro. The Euro continues to be a popular currency for storing value. However, a recession could decrease the Euro’s popularity, and cause further economic damage. This would force the ECB to increase annual bond yields, and to increase printing of new currency notes, creating an inevitable debt cycle which would sabotage the European economy.

Finally, Brexit is another key issue that needs to be resolved as soon as possible. A no-deal Brexit is just as damaging for the EU as for the UK. With Britain longing to leave the European Union, and Italy, Greece and France’s economies on the cusp of collapse, things seem to be getting worse for the European Central Bank.