Bad Government as a Reason of Recent Financial Crisis in Europe

Abstract

1. Introduction Maybe nobody believed that occurrence of price bubble in the housing market in the United States, before 2007, and bursting them, in July 2007, is the origin of the most harmful recession in the world economy after the Great Depression of 1929. The global crisis, which was started from financial market in 2007, was enlarged to real economy, affected the production process, and finally involved the goods and services, labor, and capital markets in the last quarter of 2008. Recent financial crisis caused the world to face a harsh and rapid down fall in production of industries, reduction of international trade, lack of mobility and attract of foreign investment, and debt crisis. Asian countries, especially South-East Asia always desired to constitute a union with closed and unlimited economic, social, and political relationship among countries within this region, like Europe Union by common currency such as Euro. The bad experience of financial crisis in Europe Union caused to scruple to form and organize a new union in Asia regardless of having the required potentials. East Asia has passed a terrible crisis in the nineties which economists enumerate several reasons to happen in this part of the world. Lack of productive investments of savings, currency value appreciation in the last decade, which undermined export competitiveness, dependence on flight capital for economic growth coupled with lack of proper financial infrastructure to manage huge capital inflow effectively, and the inherent weaknesses of corporate strategies of large and dominant local financial institutions, are causes to occur the crisis in East Asia (Mohamad & Nassir, 2000). Some economic experts focus on this issue financial crisis of East Asia was transmitted between these countries. They have explained which high-powered trade relationship between East Asian countries caused each non-significant and inconsiderable shock, which happens in these countries is transmitted easily with connections of economic channels among countries within this area.(Gong, Lee, & Chen, 2004) This kind of thinking, with the occurrences of serious financial crisis in Europe has prevented the effort to constitute the Asian Union to organize a new union like European Union with common currency like Euro among themselves. The current crisis of European Union is the most horrific crisis that has happened since 1957 when this union was formed. Most experts believe that recent financial crisis has made difficult for the convergence of European countries. The indebted countries of the union like Greece, Italy, Spain, Ireland, Spain, and Portugal have to refund their debts by economic austerity plans otherwise; we will encounter dark and hopeless perspective for European governments. Among the results of the financial crisis in Europe was the risk of collapse of Euro unit, instability to the whole of the European financial system as well as the decline in economic growth by 4 percent. At the same, the debts of European government have tripled from 2008 up to now, resulting in the enhancement of European government's deficit at the end of 2009; this deficit was about 9 billion euros. The labor market has also suffered with the increase of unemployment from 7.5 percent in 2008 to 9.9 percent in 2009 and 11.5 percent in 2011. In addition, the region has experience decrease of interest rate from 4.25 percent in 2008 to 1percent in the last of 2009, reduction of exports, the downturn of housing value and bankruptcy of most European banks. Financial indiscipline of members, the lack of regulatory mechanism on operation of European banks and existence of competitive and noncompetitive economic together are the most significant reasons which the weak countries of Euro area suffered a severe deficit during several years (Thalassinos, Liapis and Thalassinos, 2011a; 2011b). Then they borrowed continuously and finally; they could not repay them. …