Three connected crises that affected Europe during the global financial crisis explained

The three crises that affected Europe during the crisis were the banking crisis, sovereign debt crisis, and growth and competitive crisis.

The banking crisis is like the global financial crisis in the US, in which the banking system failed because of excessive lending, global saving glut, and bubble in the asset market. The banking crisis was a shock in the economy that led many countries to use their sovereign debt to support those banks. Sometimes, because of sovereign defaults, banks with sizeable sovereign debt funds came on the verge of bankruptcy.

Countries tried to ease the burden of their debt by implementing austerity measures such as cutting down public spending, increase in the tax regime- that weaken economies and lead to growth and competitiveness crisis. Slow growth may also make sovereigns insolvent, as they would not have a strong enough position to create the trust.

A weak economy with falling asset prices would make the balance sheet of the bank less attractive, and the fall in asset prices may create institutions insolvent. With the increase in risk, even banks would be averse to high-risk lending, thus throttling the availability of funds to grow the market.




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Abhishek Agarwal

Abhishek Agarwal

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