Nowadays it is well-known fact that the global financial crisis 2007 has affected the economy and society in Europe. There are a lot of clear evidence noted that the consequences the crisis left are enormous and never entirely recovered. Despite the fact that the first losses originally occurred in the United States, it has a profound impact on economies of countries in Europe because the whole financial system is strongly interconnected. It is rather hard to imagine on which sector of the economy the crisis did not have an impact: it affected financial and banking sectors, industrial, service sector, healthcare sector etc. It influenced considerably as well the activity of SME’s. Although the economic consequences may vary among the countries, the common trends could be easily found and analyzed. This essay examines how the economic consequences of crisis such as the rising level of unemployment and the decline in the purchasing power influenced the European society.
First of all, it is necessary to determine the notion of the financial crisis. The financial crisis is the economic situation which related to significant financial losses, decrease in production rates, cause the prices on the stock market to fall down, may constitute “bubbles”, negatively influence the currency rate performance and eventually could lead to the economic recession.
One of the main consequence of the crisis is decreasing in GDP rates. According to European Commission, the European Union in 2008 faced the recession which is the deeper than any since 1930, with a decline of about 4% of real GDP in 2009. 1 Some countries were influenced sharply – among them Baltic countries, Hungary and Romania, other were less affected – the case of Poland, Bulgaria, and Estonia. 3 The extent to which European countries were affected depends on whether the housing markets inside the country were overvalued or not. Other important factors are the dependency of the economy on export, overall the size of the whole financial sector and the proportion of risky assets. Among the reasons behind declining in GDP performance: increasing the unemployment rate, lower investments in infrastructure, reducing the investments spend on R and innovations that cut immediately after entering the economic recession. 1 That’s why governments of different countries are responsible for an immediate response to the consequence and are
supposed to offer the measures to stabilize the labor market, guarantee the benefits and support of public services and the activity of companies. The government is also supposed to focus on recovering the losses in financial sector due to the fact that this sector is one of the most important when we are considering the growth of the economy 1. Others sectors that should be stabilized first and foremost – sectors that were the most affected by the crisis.
Another consequence of the crisis that could occur is a budget crisis and Greece 2010-2015 crisis can be its prominent example. In 2010, the goverment of Greece borrowed billions of euros from International Monetary Fund and European Union. The moneylenders required Greece to introduce cut spending and additional taxes, which led to the growth of unemployment and the decrease in living standards. These policies have considerably hurt Greece economy that the country does not have enough money to pay off its obligations all alone, and still has had a necessity in bailout money. The crisis has brought to light the fact that Greece has faced bigger deficits, borrowing more than it has been reported publicly. 7
Under the pressure of European Union, Greece was required to decline its debt to 60 percent of GDP and deficits to 3 percent of GDP. However, there was no transperency of borrowing as politicians hide their them in sophisticated financial instruments created by investment banks. On 15 November 2010, Eurostat has evaluated Greece’s 2009 government deficit at 15.4% of GDP and public debt at 126.8% of GDP labeling it as the biggest deficit (as a percentage of GDP) among the EU member nations. 8
Other European countries faced relatively similar economic challenges afterward but Greece, as one of the poorest and most obligated countries, suffered the most. If Greece didn’t introduce EURO, it could have improved the economic situation of the country by printing more money in its national currency, the drachma. The CB of Greece couldn’t devaluate the currency because its monetary policy was shared with other European countries. It is well-known that European Central Bank was German-dominated, so it dictated the monetary policy that suited German economy, meanwhile thrusting Greece into a depression. Consequently,
without the euro, Greece would be able to handle unemployment and poverty without any external help, which 2008 crisis has caused.
One of the most prominent evidence of economic crisis is as well an increase of unemployment rate, especially among the young generation. Prior to the crisis European countries performed quite well: the employment rate was about 68% of the workforce, and showed the considerable increase in the employment rate among the older workers and women. The statistical data showed that the unemployment rate inside the Euro area reached 7-7,5% in 2007-2008.1 Although male unemployment tends to rise up firstly, the ones who are more influenced by shrinking the jobs particularly in a services sector are women. As the crisis impacted the service sector which encounters for 70-80% of overall employment, it significantly affected the jobs with a lower-wage rate that are occupied mostly by women. 4
Cuts in services is a consequence and at the same time the solution that government could implement in order to avoid the deficit in a budget. It is clearly visible that by 2010 the authorities were preferring to cut the costs and benefits using “austerity programs”. In Bulgaria, Romania, Ireland, and the UK, the spending on the public sector decreased dramatically. This resulted in the increase of waiting list for treatment in the Member States Ireland and the UK. Also, the portion of income that had to be spent on health treatment increased in Western Europe and this changes negatively affected those families with modest income rate. The major problem of such programs is that countries did not have a proper assessment of social impacts which each austerity program could potentially have. 4 Consequently, it was indeed hard to evaluate the effects of the implemented policies.
An attempt to decrease public expenditures had a negative impact on social inclusion and social protection systems. The main measures to reduce the public spending are: “restrictions on eligibility; shortening of benefit payment periods; reduced benefits; narrower family benefits; reduction of benefits for adults and children with disabilities; abolition of maternity and school grants; changes in cost-of-living indexation rules for benefits; cuts in sickness benefits and in social care services; increased targeting of housing and child benefits; staff
cuts in social services.” 4 The challenge is that implementation of even one measure may have a mostly impact on vulnerable category, which requires the social protection and support the most.
It is worthy of taking into account that the crisis has a huge impact on vulnerable groups or people that could be considered as relatively secure prior to the crisis but thereafter may even experience being close to the poverty. To such category belongs “in particular, people already experiencing poverty before the crisis, young people, people who are educationally disadvantaged, migrants and ethnic minorities, older people, children and lone parents”. 4 The income of such groups in the times of post-crisis decreased due to an overall decline in the employment income, the increase in taxes and the changes in pension for retirement. In addition, the purchasing power could be dramatically decreased as net income declined but the prices for basic commodities like gas, water or electricity only surged. The prices for renting an accommodation decreased but food and other additional services such as bank charges were raising as well. All these consequences may lead to a potentially “lost generation”, -with cuts in the health and education sectors there is a threat to the physical and emotional health of the children. Youth unemployment rate reached the point above 20% in the majority of Europeans countries (almost 42,5% in Spain). One more category that was strongly affected by the crisis is migrants. The possibility of losing the job and being unemployed may bring them for losing their residence permits. 4
In my opinion, the worst social consequences of the crises may be at the first glance even unnoticed but in a long-term very significant. For example, the rise of unemployment may trigger the conflicts inside the families which later on may have an impact on the physical health of people, in particular, children health could be influenced by this tensions as well. Another aspect is that when the basic needs become scarcer, poor people start to compete for
them and at the same time the rate of violence or racism may increase. People behavior may change and vary in according to the events, they can become more aggressive and intolerance in the atmosphere of the permanent pressure.
When it comes to the effects of financial crisis on the health of people, the several research papers seem controversial. They stated that in developed countries the increase in unemployment rates may have a positive impact on mortality, at the same time its decrease can have reverse consequences. These effects have been noticed in a short-term, and the extent may vary according to age, sex etc. On the other hand, some researchers argue that increases in leisure and sleep times (due to unemployment for instance) may lead to improving the health overall. The consumption of products which have a negative effect on health (tobacco and alcohol) may also decrease due to declines in income and the fact that society has less money to spend on junk food. People also tend to drive less during the crisis that results in less death in the car accidents). Other sources indicate that rising an employment of 1% may cause the suicide and murder rates to go up, meanwhile, the rise of about 3% is usually related to death from the alcohol. 6
Another very important outcome of the crisis is raising inequalities, or to put it simply an increase in the income gap between poor and rich. Moreover, governmental austerity policies and the increase in tax rate make this gap even wider. There is clear evidence which may be followed by examples of countries like Bulgaria and Hungary that an increase in value-added tax will mostly hit people with low-income boundaries. It was found by the German network that middle-class tax breaks reduced the financing for social inclusion and overall social services. 4 The solutions to the crisis can make the situation even worth. The main dilemma still remains open: Whether the European Union can afford the fact that while getting appropriate resources by increasing the tax rates to solve the budget issues, the other social problems like inequality gap are only increasing? It is well-known that an equal distribution of income is a vital component in building a sustainable development of economy and empowerment of society respectively.
When it comes to the problem of homelessness, there are two different points. On the one side, during the recession period, it is visible that the rental prices tend to decrease, meanwhile providing some “relief” for people with a low-income budget. Nevertheless, at the same time, the prices for utilities and the expenditures on nutrition tend to increase, making the accommodation not affordable for poor inhabitants. 4
The global financial crisis had a negative impact on SME’s. The activity of SME’s influences the economy of every country in a positive way. Referencing to the case of France, SME’s consist of 90% of its economy and contributed significantly to the economic development. 5 Therefore governments of European countries should be interested in changing different policies to make easier for SME’s to obtain credits even during the crisis. SME’s are important nowadays because their operations lead to job creation, fighting the unemployment and poverty during the crisis. It is proved that SME’s considerably contribute to the GDP growth, therefore, boosting the economy.
To sum up, the results of the essay have shown that the aftermath of the crisis influence the whole economic system and consequently the society and its standards of living. There is the wide range of problems that crisis brought, and solutions for them were not that easily found. The most prominent ones were raising of unemployment which could have a lot of negative effects, cutting down the public spending by implementing the austerity programs. The crisis causes budget crisis and slowing down the SME’s operations. Additionally, the impacts of the crisis were felt by society. People from vulnerable groups became less secure with cut benefits and decreased income. The gap between the richest and the poorest only widen. The behavior of the people changes during the crisis, they become more intolerant toward each other due to the pressure on them which crisis leaves. It is clearly visible that the global financial crisis caused a lot of negative consequences not only in the economies of European countries but as well inside the European society.