ASSESSMENT TASK 6

Analyze the case in Lesson 1. Use the following format.

I. Case Summary
The EU started after World War II, initially as a series of trade agreements between six
European countries geared to avoid yet another war on European soil. Six decades later, with
free-flowing trade and people, a single currency, and regional peace, it’s easy to see why so
many believed that an economic union made the best sense. However, the EU is facing its first
major economic crisis, and many pundits are questioning how the EU will handle this major
stress test.
Critics have longed argued that while the EU makes economic sense, it goes against the
long-standing political, social, and cultural history, patterns, and differences existing throughout
Europe. Not until the 2010 economic crisis in Greece did these differences become so apparent.
There was a fast-growing crisis, and the country couldn’t make its debt payments. Its
debt costs were rising because investors and bankers became wary of lending more money to
the country and demanded higher rates. Economic historians have accused the country of
covering up just how bad the deficits were with a massive deficit revision of the 2009 budget.
In the ashes of Europe’s debt crisis, some see the seeds of long-term hope. That’s
because the threat of bankruptcy is forcing governments to implement reforms that economists
argue are necessary to help Europe prosper in a globalized world—but were long viewed
politically impossible because of entrenched social attitudes. “Together, Europe’s banks have
funneled $2.5 trillion into the five shakiest euro-zone economies: Greece, Ireland, Belgium,
Portugal, and Spain”
The new distillery is a symbol of optimism for the industry after the uncertainty of the
global economic downturn. The scotch industry had been riding high when the financial crisis hit
and the subsequent collapse in demand in 2009 ricocheted through important markets like
South Korea, where sales contracted by almost 25 percent. Sales in Spain and Singapore were
down 5 percent and 9 percent respectively. There was also evidence of drinkers trading down to
cheaper spirits—such as hard-up Russians returning to vodka

II. Case Problem

Rigid EU rules don’t enable member governments to navigate their country-specific
problems, such as deficit spending and public works projects. Of note, a majority of the sixteen
countries in the monetary union have completely disregarded the EU’s Stability and Growth
Pact by running excessive deficits—that is, borrowing or spending more than the country has in
its coffers. Reducing deficits and cutting social programs often comes at a high political cost.
The crisis was eventually controlled by the financial guarantees of European countries, who
feared the collapse of the euro and financial contagion, and by the International Monetary Fund
(IMF). Rating agencies downgraded several Eurozone countries' debts.

III. Case Facts

 The EU started after World War II, initially as a series of trade agreements
between six European countries geared to avoid yet another war on European
soil.
 the EU is facing its first major economic crisis, and many pundits are questioning
how the EU will handle this major stress test.
 Borders that have fewer rules and regulations can help businesses expand
easier and more cheaply. While this sounds great in theory, economists as well
as businesspeople often ignore the realities of the political and sociocultural
factors that impact relationships between countries, businesses, and people.
 Critics have longed argued that while the EU makes economic sense, it goes
against the long-standing political, social, and cultural history, patterns, and
differences existing throughout Europe
 The crisis began in 2009 when the country faced its first negative economic
growth rate since 1993. There was a fast-growing crisis, and the country couldn’t
make its debt payments. Its debt costs were rising because investors and
bankers became wary of lending more money to the country and demanded
higher rates
 Economic historians have accused the country of covering up just how bad the
deficits were with a massive deficit revision of the 2009 budget
 In the ashes of Europe’s debt crisis, some see the seeds of long-term hope.
That’s because the threat of bankruptcy is forcing governments to implement
reforms that economists argue are necessary to help Europe prosper in a
globalized world—but were long viewed politically impossible because of
entrenched social attitudes.

IV. Alternative Courses of Action

The so-called Eurobond was proposed as a radical solution. It was a security that would
be jointly underwritten by all eurozone member states. These bonds would presumably have
traded with a low yield; they would have enabled countries to more efficiently finance their way
out of trouble. They also would have eliminated the need for additional expensive bailouts. 

V. Evaluation of Alternatives and Solution to the Problem

At the moment the European Union is a global trading power ensuring a respectable
degree of wealth and prosperity for its citizens. The economic dimension of European
integration has been a success because it was based on a liberal market economy. European
integration was the most liberal project for which the liberals were never credited. In particular
the creation of the Internal Market, the introduction of the common currency and the
implementation of European competition policy have ensured the driving force for the wealth of
European nations.
Whatever the effects in the short and in the long term, the process of enlargement will
dominate the political agenda of the European Union for years to come. The Union has to
prepare itself for membership of about 35 countries which will seriously affect the mechanism of
decision taking and the financial arrangements, in particular the Common Agricultural Policy and
the Structural Funds. This effort will without doubt consume most of the Union's political strength
and may produce an inward-looking mentality.

VI. Recommendation
The new framework sets stronger prudential requirements for banks, requiring them to
keep sufficient capital reserves and liquidity. This new framework will make EU banks more
solid and will strengthen their capacity to adequately manage the risks linked to their activities,
and absorb any losses they may incur in doing business.
Furthermore, these new rules will strengthen the requirements with regard to corporate
governance arrangements and processes of banks. For example, a number of requirements are
introduced in relation to diversity within management, in particular as regards gender balance.
In addition, in order to tackle excessive risk-taking, the framework imposes tough rules on
bonuses.

VII. Conclusion

The negative sentiment led investors to demand higher yields on sovereign bonds. This
ended up exacerbating the problem by making borrowing costs even higher. Higher yields also
led to lower bond prices; this meant larger countries and many eurozone banks holding
sovereign bonds began to lose money.

Regulatory requirements for these banks required them to write down these assets.
Then, they bolstered their reserve ratios by saving more than lending. This put a strain on
liquidity.

The Eurozone Crisis was dealt with using bailouts, quantitative easing, and lower
interest rates. Rich countries like Germany initially supported austerity measures designed to
bring down debt levels.
Some experts also believed that access to low-interest debt financing would eliminate
the need for countries to undergo austerity and only push back an inevitable day of reckoning.
The debate over how to deal with further eurozone financial crises continues