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ASSIGNMENT

ON International Trade & Finance


TOPIC : The reason behind the current crisis of EU and suggest some solution to overcome these problem SUBMITTED TO Mr. Tanvir M H Arif Asst. Professor, Dept. of Finance & Marketing University of Chittagong SUBMITTED BY Md. Rokonuggaman Khan Dept. MBA(1) ID 120204044 Date of submission 28\01\2013

BGC TRUST UNIVERSITY BANGLADESH


Introduction:
The European union or EU known as formally as the European Economic and monetary union. EU was established after 2nd world war with their neighbor country of Europe. Initially six nation involve in establish EU. They are Belgium, France, Germany, Italy, Luxembourg and Netherlands. The main objective of established EU is to create a political and economic community throughout Europe. At present there are 27 member countries include in EU. the EU is run by three bodies, the EU council, representing national government, the parliament (elected by the people) and the European commission.

Crisis:
Debt crisis is the main crisis of EU. Five of the region countries are responsible for this crisis. Greece, Portugal, Ireland, Italy and Spain failed to generate enough economic to make their ability to pay back bondholders the guarantee. Although these five were seen as being the countries in immediate danger of a possible default, the crisis across the borders of the EU. Now the crisis is not only crisis of the EU but also effected allover the world. The world face the most serious financial crisis at least the 1930s, if not ever, in October 2011.

Reason of EU crisis:
European Sovereign debt crisis is the result of three separate but interrelated plots. Crushing levels of government debt is some countries. Problems in the banking sector. The slow growth it Europe.

The financial crisis of EU is began since the US financial crisis of 2008-2009, which has exposed the unsustainable fiscal policies of countries in Europe and around the global. The crisis firstly affected the Greece because they failed to undertake fiscal reform. At the time Greece debt were so large that they actually exceed the size of the nations entire economy.

In 2003 Germany wants to produce everything in their own country. So they collect their fund issued in foreign currencies and French bank purchase a lot of Greece bonds. In this time banking regulation allow financial institution to count risk free investment as a part of their required liquidity. So the bank purchase more risks free debt which create liquidity problem in the Europe. On the other hand by late 2009 Greece unable to pay the interest on the debt. In the 3rd the show growth rate of Europe. The growth rate of Europe decreases because they more invest in real state site which did not the total economic growth. On the other hand the total production comparatively decrease and increase production cost. Another reason for European debt crisis is that the single currency does not fit the different need of member countries and unsustainable economic divergence will ultimately require that the euro be abandoned. The fatal divergences that are most frequently cited include difference in growth rate, job creation and unemployment rates, as well as dramatic in current account balance. All of which way be traceable to wide deviation in unit labor cost.

Affect of crisis:
These results are summarized. Which show what percentage of the debt of each country was issued by government? Financial institution and nonfinancial institution and what percentage of a countries total debt is represented by household debt. All the number represent a percentage of the countrys GDP. Thus in the 10 developed countries, the total debt increased form 200% of GDP in 1995 up to 300% of GDP in 2008. Some countries displayed even higher increases in the ratio between debt and GDP, Such as 1200% for Iceland and 900% for Ireland. In the case of the latter two countries, the debt level proved unsustainable and pushed them into and GDP reached the highest level are the peripheral countries of the Euro zone (Greece, Portugal, and Italy).

Solution:
Euro zone leaders latest plan to rescue the euro, agreed to late last month, focuses on two crisis : the continents ailing bank and the sovereign-debt woes of Europes southern peripheral economies. Most economists agree that renewed economic growth is essential for saving the euro. The problem is that the effects of measures such as creating a banking union, the centerpiece of the recent summits rescue plan, may save the banking system but will do nothing to reserve the loss of competitiveness among the regions economies. A higher average inflation rate in Germany can help reverse this side. But so far, the country has opposed any policy that might stoke inflation. Two horrendous periods of hyperinflations after the world wars still haunt Germans. Recently the European Central bank cut its interest rate to 0.75 percent, a historic low, amid signs of deteriorating economic activity in Europe. Some European countries have long needed better economic accountability and more responsible economic management. However, timing is crucial, reform on a wellthrough- out timetable must be distinguished from reform done in extreme haste. European should introduce "mini-jobs" with lower taxes. Create special funds and tax benefits to privatize state-owned businesses. The more reasonable solution than trying to narrow the civilization gap between the nations of the EU Another efficient way to strengthen the bond between EU citizens is by making the European Union institution more democratic.

The Euro zone member agreed last month to write down half of the Greek debt owned by the Private sector, recapitalize Europes bank and boost the fund created as a firewall to protect solvent euro-zone governments.