Chapter 1: Introduction

Inclusive and sustainable growth requires a stable economic framework and sound
management of public finances. Both are also critical for the optimal use of development
assistance, notably in the context of budget support contracts. The European Commission
supports assessments and reforms of both macroeconomic and public finance management
in partner countries.

The stability of the economy and the performance of countries' public financial management systems
are two significant factors affecting the outcome of growth and development policies: these have a far
better chance of success if they are implemented in a propitious environment. Progress in this respect
also enhances domestic accountability towards citizens and predictability for private investors. The
European Commission supports partner countries to improve their macro-economic framework and
upgrade their public finance management systems with a variety of instruments.

Fostering sound management of public funds

A national budget is an instrument to implement public policies and a statement of the political
intentions of a government. A sound system of public finance management (PFM) is essential for the
implementation of this budget and these policies, for the delivery of public services and for the
achievement of development objectives. It involves collecting resources from the economy, integrating
them into the budget, allocating them and using them in an efficient, effective, economic, equitable
and accountable manner. A sound PFM system should allow for fiscal discipline, in the first place,
which otherwise could undermine macroeconomic stability.
The PFM system of a country comprises the full budget cycle including revenue administration, budget
preparation, budget execution with cash management, procurement systems, internal controls and
internal audit, accounting and reporting, external audit and scrutiny.
The European Commission carries out assessments of PFM systems in partner countries when it
prepares its country strategy papers and programs. Such analyses are performed regularly and are
notably used within budget support contracts, for which improvement of public finance management is
an eligibility criterion.
PFM assessments explore two key aspects:

 the quality of countries' systems, which is analyzed mostly through the ‘Public Financial
Management – Performance Measurement Framework’ developed by the Public Expenditure and
Financial Accountability Initiative (PEFA) and may be complemented by other dedicated tools for
tax administration (TADAT ), public investment management (PIMA ), public procurement (MAPS )
or debt management (DEMPA );
 The PFM reform process and governments' efforts to improve its public finance management, the
relevance and level of implementation of a country’s reform strategies, and the contribution of
cooperation partners' support to PFM reforms.

The European Commission works closely with the International Monetary Fund , the World Bank and
the OECD in this area, as well with regional organizations or financial institutions. In this context, a
specific attention is paid to gender-responsive budgeting and to domestic revenue mobilization, in
general terms or in relation to natural resources and extractive industries more particularly.

Ref (https://ec.europa.eu/europeaid/sectors/economic-growth/public-finance-and-macroeconomy_en)
Chapter 2: The World Financial Crisis in 2008
The financial crisis of 2007–2008, also known as the global financial crisis
and the 2008 financial crisis, is considered by many economists to have been the
worst financial crisis since the Great Depression of the 1930s.

It began in 2007 with a crisis in the subprime mortgage market in the United
States, and developed into a full-blown international banking crisis with the
collapse of the investment bank Lehman Brothers on September 15, 2008.
Excessive risk-taking by banks such as Lehman Brothers helped to magnify the
financial impact globally. Massive bail-outs of financial institutions and other
palliative monetary and fiscal policies were employed to prevent a possible
collapse of the world financial system. The crisis was nonetheless followed by a
global economic downturn, the Great Recession. The European debt crisis, a crisis
in the banking system of the European countries using the euro, followed later.

Causes;

“It all started in US”

Banking crisis;

High mortgage approval rates led to a large pool of homebuyers, which drove up housing prices.
This appreciation in value led large numbers of homeowners (subprime or not) to borrow against
their homes as an apparent windfall. This "bubble" would be burst by a rising single-family
residential mortgages delinquency rate beginning in August 2006 and peaking in the first quarter,
2010.

The high delinquency rates led to a rapid devaluation of financial instruments (mortgage-backed
securities including bundled loan portfolios, derivatives and credit default swaps). As the value
of these assets plummeted, the market (buyers) for these securities evaporated and banks who
were heavily invested in these assets began to experience a liquidity crisis. Freddie Mac and
Fannie Mae were taken over by the federal government on September 7, 2008. Lehman Brothers
filed for bankruptcy on September 15, 2008. Merrill Lynch, AIG, HBOS, Royal Bank of
Scotland, Bradford & Bingley, Fortis, Hypo Real Estate, and Alliance & Leicester were all
expected to follow—with a US federal bailout announced the following day beginning with $85
billion to AIG. In spite of trillions paid out by the US federal government, it became much more
difficult to borrow money. The resulting decrease in buyers caused housing prices to plummet.

Consequences;
While the collapse of large financial institutions was prevented by the bailout of banks by
national governments, stock markets still dropped worldwide. In many areas, the housing market
also suffered, resulting in evictions, foreclosures, and prolonged unemployment. The crisis
played a significant role in the failure of key businesses, declines in consumer wealth estimated
in trillions of US dollars, and a downturn in economic activity leading to the Great Recession of
2008–2012 and contributing to the European sovereign-debt crisis. The active phase of the crisis,
which manifested as a liquidity crisis.

The bursting of the US housing bubble, which peaked at the end of 2006, caused the values of
securities tied to US real estate pricing to plummet, damaging financial institutions globally. The
financial crisis was triggered by a complex interplay of policies that encouraged home
ownership, providing easier access to loans for subprime borrowers; overvaluation of bundled
subprime mortgages based on the theory that housing prices would continue to escalate;
questionable trading practices on behalf of both buyers and sellers; compensation structures that
prioritize short-term deal flow over long-term value creation; and a lack of adequate capital
holdings from banks and insurance companies to back the financial commitments they were
making. Questions regarding bank solvency, declines in credit availability, and damaged investor
confidence affected global stock markets, where securities suffered large losses during 2008 and
early 2009. Economies worldwide slowed during this period, as credit tightened and international
trade declined.

Global effects;

https://www.bing.com/search?q=%202008%20world%20debt&qs=n&form=
QBRE&sp=-1&pq=2008%20world%20debt&sc=4-
15&sk=&cvid=E41A9562BBEB4328A435862ED620495C

https://en.wikipedia.org/wiki/European_debt_crisis