European economy is facing tremendous problems. Most of the problems are created due to increase of spending sourced by borrowing. We are reproducing one good article below for the benefit of our readers.
European Economy-What Are The Problems
In this Article I am going to discuss the problems which the economies of the European countries are facing right now. Although different countries have different issues I thought there is one underlying commonness in all the problems. The major reason for the problems in European Economy is unusual growth funded entirely by borrowed funds without any corresponding rise in incomes.
I wrinkle I would make a brief growth again, as I have been watching the slip of Europe into a mess up with a feeling of watching a close circuit footage of a road accident.
Since the issues are being raised about the debts of countries like Greece, Portugal, Italy, Ireland & Spain the administrators have implemented a chain of bailouts, negotiations, strict measures & so on….but still the crisis pops back actively in haste. In all of the above cases, the troubled economies were long living on borrowed money, and that borrowed money has shaped the composition of the economies. The borrowed money was utilized for consumption, and the consumption beyond the actual income was unsustainable. As you would agree, the savings rate is directory determined by Income & consumption rates. If there is an increase in consumption without any changes in the underlying income in long run, the savings would in fact be –ve (negative).
The economic logic underlying this phenomenon is that the country’s economic growth would be entirely financed by the borrowed money which would in, short term increase consumption, employment & GDP rates. This improved statistics would again tempt the lenders to lend even more. However, the problem with the recovery plan of all the administrators seeking to save European countries from the crisis is that if we don’t have a internal growth in the underlying capacity or resources of the economy & if the inflow of borrowed money stops, the growth cycle would break & it would reverse the positive impacts it had generated on employment, consumption & GDP.
Borrowing money for consumption purpose is the main issue which is causing a drop in savings & the actual underlying growth of the countries.
Somehow, it is necessary for consumption within a crisis lands to come back into balance vis a vis creating capacity of the country.
We have seen that one of the major reasons for the problems in European countries are originated from excessive borrowings. There might be any ancillary issues which I have not covered here.
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