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ISSN 0379-0991 Economic Crisis in Europe: Causes, Consequences and Responses EUROPEAN ECONOMY 7|2009 EUROPEAN COMMISSION The European Economy series contains important reports and communications from the Commission to the Council and the Parliament on the economic situation and developments, such as the Economic forecasts, the annual EU economy review and the Public ? nances in EMU report. Subscription terms are shown on the back cover and details on how to obtain the list of sales agents are shown on the inside back cover.Unless otherwise indicated, the texts are published under the responsibility of the Directorate-General for Economic and Financial Affairs of the European Commission, BU24, B-1049 Brussels, to which enquiries other than those related to sales and subscriptions should be addressed. LEGAL NOTICE Neither the European Commission nor any person acting on its behalf may be held responsible for the use which may be made of the information contained in this publication, or for any errors which, despite careful preparation and checking, may appear.More information on the European Union is available on the Internet (http://europa. eu). Cataloguing data can be found at the end of this publication. Luxembourg: Of? ce for Of? cial Publications of the European Communities, 2009 ISBN 978-92-79-11368-0 doi 10. 2765/845 40 Ã‚ © European Communities, 2009 Reproduction is authorised provided the source is acknowledged. Printed in Luxembourg European Commission Directorate-General for Economic and Financial Affairs Economic Crisis in Europe: Causes, Consequences and ResponsesEUROPEAN ECONOMY 7/2009 FOREWORD The European economy is in the midst of the deepest recession since the 1930s, with real GDP projected to shrink by some 4% in 2009, the sharpest contraction in the history of the European Union. Although signs of improvement have appeared recently, recovery remains uncertain and fragile. The EUÃ¢â‚¬â„¢s response to the downturn has been swift and decisive. A side from intervention to stabilise, restore and reform the banking sector, the European Economic Recovery Plan (EERP) was launched in December 2008.The objective of the EERP is to restore confidence and bolster demand through a coordinated injection of purchasing power into the economy complemented by strategic investments and measures to shore up business and labour markets. The overall fiscal stimulus, including the effects of automatic stabilisers, amounts to 5% of GDP in the EU. According to the Commission's analysis, unless policies take up the new challenges, potential GDP in the EU could fall to a permanently lower trajectory, due to several factors. First, protracted spells of unemployment in the workforce tend to lead to a permanent loss of skills.Second, the stock of equipment and infrastructure will decrease and become obsolete due to lower investment. Third, innovation may be hampered as spending on research and development is one of the first outlays that businesses cu t back on during a recession. Member States have implemented a range of measures to provide temporary support to labour markets, boost investment in public infrastructure and support companies. To ensure that the recovery takes hold and to maintain the EUÃ¢â‚¬â„¢s growth potential in the long-run, the focus must increasingly shift from short-term demand management to supply-side structural measures.Failing to do so could impede the restructuring process or create harmful distortions to the Internal Market. Moreover, while clearly necessary, the bold fiscal stimulus comes at a cost. On the current course, public debt in the euro area is projected to reach 100% of GDP by 2014. The Stability and Growth Pact provides the flexibility for the necessary fiscal stimulus in this severe downturn, but consolidation is inevitable once the recovery takes hold and the risk of an economic relapse has diminished sufficiently.While respecting obligations under the Treaty and the Stability and Growth Pact, a differentiated approach across countries is appropriate, taking into account the pace of recovery, fiscal positions and debt levels, as well as the projected costs of ageing, external imbalances and risks in the financial sector. Preparing exit strategies now, not only for fiscal stimulus, but also for government support for the financial sector and hard-hit industries, will enhance the effectiveness of these measures in the short term, as this depends upon clarity regarding the pace with which such measures will be withdrawn.Since financial markets, businesses and consumers are forward-looking, expectations are factored into decision making today. The precise timing of exit strategies will depend on the strength of the recovery, the exposure of Member States to the crisis and prevailing internal and external imbalances. Part of the fiscal stimulus stemming from the EERP will taper off in 2011, but needs to be followed up by sizeable fiscal consolidation in following years to reverse the unsustainable debt build-up.In the financial sector, government guarantees and holdings in financial institutions will need to be gradually unwound as the private sector gains strength, while carefully balancing financial stability with competitiveness considerations. Close coordination will be important. Ã¢â‚¬ËœVerticalÃ¢â‚¬â„¢ coordination between the various strands of economic policy (fiscal, structural, financial) will ensure that the withdrawal of government measures is properly sequenced Ã¢â‚¬â€ an important consideration as turning points may differ across policy areas. HorizontalÃ¢â‚¬â„¢ coordination between Member States will help them to avoid or manage cross-border economic spillover effects, to benefit from shared learning and to leverage relationships with the outside world. Moreover, within the euro area, close coordination will ensure that Member StatesÃ¢â‚¬â„¢ growth trajectories do not diverge as the economy recovers. Addressing the underlying cause s of diverging competitiveness must be an integral part of any exit strategy.The exit strategy should also ensure that Europe maintains its place at the frontier of the low-carbon revolution by investing in renewable energies, low carbon technologies and Ã¢â‚¬Å"greenÃ¢â‚¬ infrastructure. The aim of this study is to provide the analytical underpinning of such a coordinated exit strategy. Marco Buti Director-General, DG Economic and Financial Affairs, European Commission ABBREVIATIONS AND SYMBOLS USED Member States BE BG CZ DK DE EE EL ES FR IE IT CY LV LT LU HU MT NL AT PL PT RO SI SK FI SE UK EA-16 EU-10 EU-15 EU-25 EU-27 Currencies EUR BGN CZK DKK EEK GBP HUF JPY LTL LVL PLN RON SEKBelgium Bulgaria Czech Republic Denmark Germany Estonia Greece Spain France Ireland Italy Cyprus Latvia Lithuania Luxembourg Hungary Malta The Netherlands Austria Poland Portugal Romania Slovenia Slovakia Finland Sweden United Kingdom European Union, Member States having adopted the single currency (BE , DE, EL, SI, SK, ES, FR, IE, IT, CY, LU, MT, NL, AT, PT and FI) European Union Member States that joined the EU on 1 May 2004 (CZ, EE, CY, LT, LV, HU, MT, PL, SI, SK) European Union, 15 Member States before 1 May 2004 (BE, DK, DE, EL, ES, FR, IE, IT, LU, NL, AT, PT, FI, SE and UK) European Union, 25 Member States before 1 January 2007 European Union, 27 Member States euro New Bulgarian lev Czech koruna Danish krone Estonian kroon Pound sterling Hungarian forint Japanese yen Lithuanian litas Latvian lats New Polish zloty New Romanian leu Swedish krona iv SKK USD Slovak koruna US dollar Other abbreviations BEPG Broad Economic Policy Guidelines CESR Committee of European Securities Regulators EA Euro area ECB European Central Bank ECOFIN European Council of Economics and Finance Ministers EDP Excessive deficit procedure EMU Economic and monetary union ERM II Exchange Rate Mechanism, mark II ESCB European System of Central Banks Eurostat Statistical Office of the European Communities F DI Foreign direct investment GDP Gross domestic product GDPpc Gross Domestic Product per capita GLS Generalised least squares HICP Harmonised index of consumer prices HP Hodrick-Prescott filterICT Information and communications technology IP Industrial Production MiFID Market in Financial Instruments Directive NAWRU Non accelerating wage inflation rate of unemployment NEER Nominal effective exchange rate NMS New Member States OCA Optimum currency area OLS Ordinary least squares R Research and development RAMS Recently Acceded Member States REER Real effective exchange rate SGP Stability and Growth Pact TFP Total factor productivity ULC Unit labour costs VA Value added VAT Value added tax v ACKNOWLEDGEMENTS This special edition of the EU Economy: 2009 Review Ã¢â‚¬Å"Economic Crisis in Europe: Causes, Consequences and ResponsesÃ¢â‚¬ was prepared under the responsibility of Marco Buti, Director-General for Economic and Financial Affairs, and Istvan P. Szekely, Director for Economic St udies and Research. Paul van den Noord, Adviser in the Directorate for Economic Studies and Research, served as the global editor of the report.The report has drawn on substantive contributions by Ronald Albers, Alfonso Arpaia, Uwe Bower, Declan Costello, Jan in Ã¢â‚¬Ëœt Veld, Lars Jonung, Gabor Koltay, Willem Kooi, Gert-Jan Koopman, Martin Hradisky, Julia Lendvai, Mauro Griorgo Marrano, Gilles Mourre, Michal Narozny, Moises Orellana Pena, Dario Paternoster, Lucio Pench, Stephanie Riso, Werner Roger, Eric Ruscher, Alessandra Tucci, Alessandro Turrini, Lukas Vogel and Guntram Wolff. The report benefited from extensive comments by John Berrigan, Daniel Daco, Oliver Dieckmann, Reinhard Felke, Vitor Gaspar, Lars Jonung, Sven Langedijk, Mary McCarthy, Matthias Mors, Andre Sapir, Massimo Suardi, Istvan P. Szekely, Alessandro Turrini, Michael Thiel and David Vergara. Statistical assistance was provided by Adam Kowalski, Daniela Porubska and Christopher Smyth. Adam Kowalski and Greta Haems were responsible for the lay-out of the report.Comments on the report would be gratefully received and should be sent, by mail or e-mail, to: Paul van den Noord European Commission Directorate-General for Economic and Financial Affairs Directorate for Economic Studies and Research Office BU-1 05-189 B-1049 Brussels E-mail: paul. [emailÃ‚ protected] europa. eu vi CONTENTS Executive Summary 1. 2. 3. A crisis of historic proportions Vast policy challenges A strong call on EU coordination 1 1 1 5 Part I: Anatomy of the crisis 1. Root causes of the crisis 1. 1. 1. 2. 1. 3. Introduction A chronology of the main events Global forces behind the crisis Introduction Great crises in the past The policy response then and now Lessons from the past 7 8 8 9 10 2. The crisis from a historical perspective 2. 1. 2. 2. 2. 3. 2. 4. 14 14 14 18 20 Part II: Economic consequences of the crisis 1. Impact on actual and potential growth 1. 1. 1. 2. 1. 3. 1. 4.Introduction The impact on economic activity A s ymmetric shock with asymmetric implications The impact of the crisis on potential growth Introduction Recent developments Labour market expectations A comparison with recent recessions Introduction Tracking developments in fiscal deficits Tracking public debt developments Fiscal stress and sovereign risk spreads Introduction Sources of global imbalances Global imbalances since the crisis Implications for the EU economy 23 24 24 24 27 30 2. Impact on labour market and employment 2. 1. 2. 2. 2. 3. 2. 4. 35 35 35 37 38 3. Impact on budgetary positions 3. 1. 3. 2. 3. 3. 3. 4. 41 41 41 43 44 4. Impact on global imbalances 4. 1. 4. 2. 4. 3. 4. 4. 46 46 46 48 50 Part III:Policy responses 1. A primer on financial crisis policies 1. 1. 1. 2. 1. 3. Introduction The EU crisis policy framework The importance of EU coordination 55 56 56 58 59 2. Crisis control and mitigation 62 vii 2. 1. 2. 2. 2. 3. 2. 4. Introduction Banking support Macroeconomic policies Structural policies Introduction Crisis resolution policies Crisis prevention Introduction The pursuit of crisis resolution The role of EU coordination 62 62 64 71 3. Crisis resolution and prevention 3. 1. 3. 2. 3. 3. 78 78 78 80 4. Policy challenges ahead 4. 1. 4. 2. 4. 3. 82 82 82 85 References 87 LIST OF TABLES II. 1. 1. II. 1. 2. III. 1. 1. III. 2. 1. III. 2. 2.Main features of the Commission forecast The Commission forecast by country Crisis policy frameworks: a conceptional illustration Public interventions in the banking sector Labour market and social protection measures in Member States' recovery programmes 71 27 27 58 63 LIST OF GRAPHS I. 1. 1. I. 1. 2. I. 1. 3. I. 1. 4. I. 1. 5. I. 1. 6. I. 1. 7. I. 2. 1. I. 2. 2. I. 2. 3. I. 2. 4. I. 2. 5. I. 2. 6. II. 1. 1. II. 1. 2. II. 1. 3. II. 1. 4. II. 1. 5. II. 1. 6. II. 1. 7. Projected GDP growth for 2009 Projected GDP growth for 2010 3-month interbank spreads vs T-bills or OIS Bank lending to private economy in the euro area, 2000-09 Corporate 10 year-spreads vs.Gove rnment in the euro area, 2000-09 Real house prices, 2000-09 Stock markets, 2000-09 GDP levels during three global crises World average of own tariffs for 35 countries, 1865-1996, un-weighted average, per cent of GDP World industrial output during the Great Depression and the current crisis The decline in world trade during the crisis of 1929-1933 The decline in world trade during the crisis of 2008-2009 Unemployment rates during the Great Depression and the present crisis in the US and Europe Bank lending standards Manufacturing PMI and world trade Quarterly growth rates in the EU Construction activity and current account position Growth composition in current account surplus countries Growth compostion of current account deficit countries Potential growth 2007-2013, euro area 18 24 24 27 29 30 30 31 15 16 16 16 8 8 9 10 10 12 12 15 viii II. 1. 8. II. 1. 9. II. 1. 10. II. 2. 1. II. 2. 2. II. 2. 3. II. 2. 4. II. 2. 5. II. 2. 6. II. 2. 7. II. 2. 8. II. 2. 9. II. 2. 10. II. 2. 11. II. 2. 12. II. 3. 1. II. 3. 2. II. 3. 3. II. 3. 4. II. 3. 5. II. 3. 6. II. 3. 7. II. 3. 8. II. 4. 1. II. 4. 2. II. 4. 3. II. 4. 4. II. 4. 5. III. 2. 1. III. 2. 2. III. 2. 3. III. 2. 4. III. 2. 5. III. 2. 6. III. 2. 7. III. 2. 8. III. 2. 9. III. 2. 10.Potential growth 2007-2013, euro outs Potential growth 2007-2013, most recently acceding Member States Potential growth by Member State Unemployment rates in the European Union Employment growth in the European Union Unemployment and unemployment expectations Unemployment and hours worked Change in monthly unemployment rate Ã¢â‚¬â€œ Italy Unemployment expectations over next 12 months (Consumer survey) Ã¢â‚¬â€œ Italy Change in monthly unemployment rate Ã¢â‚¬â€œ Germany Unemployment expectations over next 12 months (Consumer survey) Germany Change in monthly unemployment rate Ã¢â‚¬â€œ France Unemployment expectations over next 12 months (Consumer survey) Ã¢â‚¬â€œ France Change in monthly unemployment rate Ã¢â‚¬â€œ United Kingdom Unemployment expectations over next 12 months (Consumer survey) Ã¢â‚¬â€œ United Kingdom Tracking the fiscal position against previous banking crises Change in fiscal position and employment in construction Change in fiscal position and real house prices Fiscal positions by Member State Tracking general government debt against previous banking crises Gross public debt Fiscal space by Member State, 2009 Fiscal space and risk premia on government bond yields Current account balances Trade balance in GCC countries and oil prices The US trade deficit The Euro Area trade balance China's GDP growth rate and current account to GDP ratio Macroeconomic policy mix in the euro area Macroeconomic policy mix in the United Kingdom Macroeconomic policy mix in the United States Central bank policy rates ECB policy and eurozone overnight rates Central bank balance sheets Fiscal stimulus in 2009 Fiscal stimulus in 2010 Output gap and fiscal stimulus in 2009 Fiscal space and fiscal stimulus in 2009 31 31 32 35 36 3 7 38 40 40 40 40 40 40 40 40 41 42 42 42 43 44 44 45 46 49 50 51 52 65 65 65 66 66 66 67 68 68 69 LIST OF BOXES I. 1. 1. I. 2. 1. II. 1. 1. II. 1. 2. II. 1. 3. II. 1. 4. II. 4. 1. III. 1. 1.Estimates of financial market losses Capital flows and the crisis of 1929-1933 and 2008-2009 Impact of credit losses on the real economy The growth impact of the current and previous crises Financial crisis and potential growth: econometric evidence Financial crisis and potential growth: evidence from simulations with QUEST Making sense of recent Chinese trade data. Concise calendar of EU policy actions 11 17 25 28 33 34 49 57 ix III. 2. 1. III. 2. 2. III. 2. 3. III. 2. 4. Measuring the economic impact of fiscal stimulus under the EERP EU balance of payments assistance Labour market and social protection crisis measures: examples of good practice EU-level financial contributions 70 73 76 77 x EXECUTIVE SUMMARY assively liquidated their positions and stock markets went into a tailspin. From then o nward the EU economy entered the steepest downturn on record since the 1930s. The transmission of financial distress to the real economy evolved at record speed, with credit restraint and sagging confidence hitting business investment and household demand, notably for consumer durables and housing. The cross-border transmission was also extremely rapid, due to the tight connections within the financial system itself and also the strongly integrated supply chains in global product markets. EU real GDP is projected to shrink by some 4% in 2009, the sharpest contraction in its history.And although signs of an incipient recovery abound, this is expected to be rather sluggish as demand will remain depressed due to deleveraging across the economy as well as painful adjustments in the industrial structure. Unless policies change considerably, potential output growth will suffer, as parts of the capital stock are obsolete and increased risk aversion will weigh on capital formation and R&D. The ongoing recession is thus likely to leave deep and long-lasting traces on economic performance and entail social hardship of many kinds. Job losses can be contained for some time by flexible unemployment benefit arrangements, but eventually the impact of rapidly rising unemployment will be felt, with downturns in housing markets occurring simultaneously affecting (notably highly-indebted) households.The fiscal positions of governments will continue to deteriorate, not only for cyclical reasons, but also in a structural manner as tax bases shrink on a permanent basis and contingent liabilities of governments stemming from bank rescues may materialise. An open question is whether the crisis will weaken the incentives for structural reform and thereby adversely affect potential growth further, or whether it will provide an opportunity to undertake far-reaching policy actions. 2. VAST POLICY CHALLENGES 1. A CRISIS OF HISTORIC PROPORTIONS The financial crisis that hit the global econ omy since the summer of 2007 is without precedent in post-war economic history. Although its size and extent are exceptional, the crisis has many features in common with similar financial-stress driven recession episodes in the past.The crisis was preceded by long period of rapid credit growth, low risk premiums, abundant availability of liquidity, strong leveraging, soaring asset prices and the development of bubbles in the real estate sector. Over-stretched leveraging positions rendered financial institutions extremely vulnerable to corrections in asset markets. As a result a turn-around in a relatively small corner of the financial system (the US subprime market) was sufficient to topple the whole structure. Such episodes have happened before (e. g. Japan and the Nordic countries in the early 1990s, the Asian crisis in the late-1990s). However, this time is different, with the crisis being global akin to the events that triggered the Great Depression of the 1930s.While it may be appropriate to consider the Great Depression as the best benchmark in terms of its financial triggers, it has also served as a great lesson. At present, governments and central banks are well aware of the need to avoid the policy mistakes that were common at the time, both in the EU and elsewhere. Large-scale bank runs have been avoided, monetary policy has been eased aggressively, and governments have released substantial fiscal stimulus. Unlike the experience during the Great Depression, countries in Europe or elsewhere have not resorted to protectionism at the scale of the 1930s. It demonstrates the importance of EU coordination, even if this crisis provides an opportunity for further progress in this regard.In its early stages, the crisis manifested itself as an acute liquidity shortage among financial institutions as they experienced ever stiffer market conditions for rolling over their (typically shortterm) debt. In this phase, concerns over the solvency of financial instituti ons were increasing, but a systemic collapse was deemed unlikely. This perception dramatically changed when a major US investment bank (Lehman Brothers) defaulted in September 2008. Confidence collapsed, investors The current crisis has demonstrated the importance of a coordinated framework for crisis management. It should contain the following building blocks: Ã¢â‚¬ ¢ Crisis prevention to prevent a repeat in the future. This should be mapped onto a collective 1 European Commission Economic Crisis in Europe: Causes, Consequences and Responses udgment as to what the principal causes of the crisis were and how changes in macroeconomic, regulatory and supervisory policy frameworks could help prevent their recurrence. Policies to boost potential economic growth and competitiveness could also bolster the resilience to future crises. Ã¢â‚¬ ¢ Crisis control and mitigation to minimise the damage by preventing systemic defaults or by containing the output loss and easing the social hardship stemming from recession. Its main objective is thus to stabilise the financial system and the real economy in the short run. It must be coordinated across the EU in order to strike the right balance between national preoccupations and spillover effects affecting other Member States. Crisis resolution to bring crises to a lasting close, and at the lowest possible cost for the taxpayer while containing systemic risk and securing consumer protection. This requires reversing temporary support measures as well action to restore economies to sustainable growth and fiscal paths. Inter alia, this includes policies to restore banks' balance sheets, the restructuring of the sector and an orderly policy Ã¢â‚¬Ëœexit'. An orderly exit strategy from expansionary macroeconomic policies is also an essential part of crisis resolution. The beginnings of such a framework are emerging, building on existing institutions and legislation, and complemented by new initiatives.But of course policy makers in Europe have had no choice but to employ the existing mechanisms and procedures. A framework for financial crisis prevention appeared, with hindsight, to be underdeveloped Ã¢â‚¬â€œ otherwise the crisis would most likely not have happened. The same held true to some extent for the EU framework for crisis control and mitigation, at least at the initial stages of the crisis. Quite naturally, most EU policy efforts to date have been in the pursuit of crisis control and mitigation. But first steps have also been taken to redesign financial regulation and supervision Ã¢â‚¬â€œ both in Europe and elsewhere Ã¢â‚¬â€œ with a view to crisis prevention. By contrast, the adoption of crisis resolution policies has not begun in earnest yet.This is now becoming urgent Ã¢â‚¬â€œ not least because it should underpin the effectiveness of control policies via its impact on confidence. 2. 1. Crisis control and mitigation Aware of the risk of financial and economic meltdown central banks and governments in the European Union embarked on massive and coordinated policy action. Financial rescue policies have focused on restoring liquidity and capital of banks and the provision of guarantees so as to get the financial system functioning again. Deposit guarantees were raised. Central banks cut policy interest rates to unprecedented lows and gave financial institutions access to lender-of-last-resort facilities.Governments provided liquidity facilities to financial institutions in distress as well, along with state guarantees on their liabilities, soon followed by capital injections and impaired asset relief. Based on the coordinated European Economy recovery Plan (EERP), a discretionary fiscal stimulus of some 2% of GDP was released Ã¢â‚¬â€œ of which two-thirds to be implemented in 2009 and the remainder in 2010 Ã¢â‚¬â€œ so as to hold up demand and ease social hardship. These measures largely respected agreed principles of being timely and targeted, although there are concerns that in some cases measures were not of a temporary nature and therefore not easily reversed.In addition, the Stability and Growth Pact was applied in a flexible and supportive manner, so that in most Member States the automatic fiscal stabilisers were allowed to operate unfettered. The dispersion of fiscal stimulus across Member States has been substantial, but this is generally Ã¢â‚¬â€œ and appropriately Ã¢â‚¬â€œ in line with differences in terms of their needs and their fiscal room for manoeuvre. In addition, to avoid unnecessary and irreversible destruction of (human and entrepreneurial) capital, support has been provided to hard-hit but viable industries while part-time unemployment claims were allowed on a temporary basis, with the EU taking the lead in developing guidelines on the design of labour market policies during the crisis.The EU has played an important role to provide guidance as to how state aid policies Ã¢â‚¬â€œ including to the financial sector Ã¢â‚¬â€œ could be shaped so as to pay respect to competition rules. Moreover, the EU has provided balance-of payments assistance jointly with the IMF and World Bank to Member States in Central and Eastern Europe, as these have been exposed to reversals of international capital flows. 2 Executive Summary Finally, direct EU support to economic activity was provided through substantially increased loan support from the European Investment Bank and the accelerated disbursal of structural funds. These crisis control policies are largely achieving their objectives.Although banks' balance sheets are still vulnerable to higher mortgage and credit default risk, there have been no defaults of major financial institutions in Europe and stock markets have been recovering. With short-term interest rates near the zero mark and Ã¢â‚¬Ëœnon-conventional' monetary policies boosting liquidity, stress in interbank credit markets has receded. Fiscal stimulus proves relatively effective owing to the liquidity and credit constraints fa cing households and businesses in the current environment. Economic contraction has been stemmed and the number of job losses contained relative to the size of the economic contraction. 2. 2. Crisis resolution ontext, the reluctance of many banks to reveal the true state of their balance sheets or to exploit the extremely favourable earning conditions induced by the policy support to repair their balance sheets is of concern. It is important as well that financial repair be done at the lowest possible long-term cost for the tax payer, not only to win political support, but also to secure the sustainability of public finances and avoid a long-lasting increase in the tax burden. Financial repair is thus essential to secure a satisfactory rate of potential growth Ã¢â‚¬â€œ not least also because innovation depends on the availability of risk financing. Ã¢â‚¬ ¢ Macroeconomic policies. Macroeconomic stimulus Ã¢â‚¬â€œ both monetary and fiscal Ã¢â‚¬â€œ has been employed extensively.The chal lenge for central banks and governments now is to continue to provide support to the economy and the financial sector without compromising their stability-oriented objectives in the medium term. While withdrawal of monetary stimulus still looks some way off, central banks in the EU are determined to unwind the supportive stance of monetary policies once inflation pressure begins to emerge. At that point a credible exit strategy for fiscal policy must be firmly in place in order to pre-empt pressure on governments to postpone or call off the consolidation of public finances. The fiscal exit strategy should spell out the conditions for stimulus withdrawal and must be credible, i. e. ased on pre-committed reforms of entitlements programmes and anchored in national fiscal frameworks. The withdrawal of fiscal stimulus under the EERP will be quasi automatic in 2010-11, but needs to be followed up by very substantial Ã¢â‚¬â€œ though differentiated across Member States Ã¢â‚¬â€œ fiscal conso lidation to reverse the adverse trends in public debt. An appropriate mix of expenditure restraint and tax increases must be pursued, even if this is challenging in an environment where distributional conflicts are likely to arise. The quality of public finances, including its impact on work incentives and economic efficiency at large, is an overarching concern. Ã¢â‚¬ ¢ Structural policies.Even prior to the financial crisis, potential output growth was expected to roughly halve to as little as around 1% by the While there is still major uncertainty surrounding the pace of economic recovery, it is now essential that exit strategies of crisis control policies be designed, and committed to. This is necessary both to ensure that current actions have the desired effects and to secure macroeconomic stability. Having an exit strategy does not involve announcing a fixed calendar for the next moves, but rather defines those moves, including their direction and the conditions that must be sat isfied for making them. Exit strategies need to be in place for financial, macroeconomic and structural policies alike: Ã¢â‚¬ ¢ Financial policies.An immediate priority is to restore the viability of the banking sector. Otherwise a vicious circle of weak growth, more financial sector distress and ever stiffer credit constraints would inhibit economic recovery. Clear commitments to restructure and consolidate the banking sector should be put in place now if a Japan-like lost decade is to be avoided in Europe. Governments may hope that the financial system will grow out of its problems and that the exit from banking support would be relatively smooth. But as long as there remains a lack of transparency as to the value of banks' assets and their vulnerability to economic and financial developments, uncertainty remains. In this 3European Commission Economic Crisis in Europe: Causes, Consequences and Responses 2020s due to the ageing population. But such low potential growth rates are li kely to be recorded already in the years ahead in the wake of the crisis. As noted, it is important to decisively repair the longer-term viability of the banking sector so as to boost productivity and potential growth. But this will not suffice and efforts are also needed in the area of structural policy proper. A sound strategy should include the exit from temporary measures supporting particular sectors and the preservation of jobs, and resist the adoption or expansion of schemes to withdraw labour supply.Beyond these defensive objectives, structural policies should include a review of social protection systems with the emphasis on the prevention of persistent unemployment and the promotion of a longer work life. Further labour market reform in line with a flexicuritybased approach may also help avoid the experiences of past crises when hysteresis effects led to sustained period of very high unemployment and the permanent exclusion of some from the labour force. Product market ref orms in line with the priorities of the Lisbon strategy (implementation of the single market programme especially in the area of services, measures to reduce administrative burden and to promote R and innovation) will also be key to raising productivity and creating new employment opportunities.The transition to a low-carbon economy should be pursued through the integration of environmental objectives and instruments in structural policy choices, notably taxation. In all these areas, policies that carry a low budgetary cost should be prioritised. 2. 3. Crisis prevention particular in China, into the world economy. This prompted accommodative monetary and fiscal policies. Buoyant financial conditions also had microeconomic roots and these tended to interact with the favourable macroeconomic environment. The list of contributing factors is long, including the development of complex Ã¢â‚¬â€œ but poorly supervised Ã¢â‚¬â€œ financial products and excessive short-term risk-taking.Crisis p revention policies should tackle these deficiencies in order to avoid repetition in the future. There are again agendas for financial, macroeconomic and structural policies: Ã¢â‚¬ ¢ Financial policies. The agenda for regulation and supervision of financial markets in the EU is vast. A number of initiatives have been taken already, while in some areas major efforts are still needed. Action plans have been put forward by the EU to strengthen the regulatory framework in line with the G20 regulatory agenda. With the majority of financial assets held by cross-border banks, an ambitious reform of the European system of supervision, based on the recommendations made by the High-Level Group chaired by Mr Jacques de Larosiere, is under discussion.Initiatives to achieve better remuneration policies, regulatory coverage of hedge funds and private equity funds are being considered but have yet to be legislated. In many other areas progress is lagging. Regulation to ensure that enough provisions and capital be put aside to cope with difficult times needs to be developed, with accounting frameworks to evolve in the same direction. A certain degree of commonality and consistency across the rule books in Member States is important and a single regulatory rule book, as soon as feasible, desirable. It is essential that a robust and effective bank stabilisation and resolution framework is developed to govern what happens when supervision fails, including effective deposit protection.Consistency and coherence across the EU in dealing with problems in such institutions is a key requisite of a much improved operational and regulatory framework within the EU. Ã¢â‚¬ ¢ Macroeconomic policies. Governments in many EU Member States ran a relatively A broad consensus is emerging that the ultimate causes of the crisis reside in the functioning of financial markets as well as macroeconomic developments. Before the crisis broke there was a strong belief that macroeconomic instability had bee n eradicated. Low and stable inflation with sustained economic growth (the Great Moderation) were deemed to be lasting features of the developed economies.It was not sufficiently appreciated that this owed much to the global disinflation associated with the favourable supply conditions stemming from the integration of surplus labour of the emerging economies, in 4 Executive Summary accommodative fiscal policy in the Ã¢â‚¬Ëœgood times' that preceded the crisis. Although this cannot be seen as the main culprit of the crisis, such behaviour limits the fiscal room for manoeuvre to respond to the crisis and can be a factor in producing a future one Ã¢â‚¬â€œ by undermining the longer-term sustainability of public finances in the face of aging populations. Policy agendas to prevent such behaviour should thus be prominent, and call for a stronger coordinating role for the EU alongside the adoption of credible national medium-term frameworks.Intra-area adjustment in the Economic and Monetary Union (which constitutes two-thirds of the EU) will need to become smoother in order to prevent imbalances and the associated vulnerabilities from building up. This reinforces earlier calls, such as in the Commission's [emailÃ‚ protected] report (European Commission, 2008a), to broaden and deepen the EU surveillance to include intra-area competitiveness positions. Ã¢â‚¬ ¢ Structural policies. Structural reform is among the most powerful crisis prevention policies in the longer run. By boosting potential growth and productivity it eases the fiscal burden, facilitates deleveraging and balance sheet restructuring, improves the political economy conditions for correcting cross-country imbalances, makes income redistribution issues less onerous and eases the terms of the inflation-output trade-off.Further financial development and integration can help to improve the effectiveness of and the political incentives for structural reform. at the Heads of State Level in the autumn of 2008 Ã¢ â‚¬â€œ for the first time in history also of the Eurogroup Ã¢â‚¬â€œ to coordinate these moves. The Commission's role at that stage was to provide guidance so as to ensure that financial rescues attain their objectives with minimal competition distortions and negative spillovers. Fiscal stimulus also has cross-border spillover effects, through trade and financial markets. Spillover effects are even stronger in the euro area via the transmission of monetary policy responses.The EERP adopted in November 2008, which has defined an effective framework for coordination of fiscal stimulus and crisis control policies at large, was motivated by the recognition of these spillovers. Ã¢â‚¬ ¢ At the crisis resolution stage a coordinated approach is necessary to ensure an orderly exit of crisis control policies across Member States. It would not be envisaged that all Member State governments exit at the same time (as this would be dictated by the national specific circumstances). But it would be important that state aid for financial institutions (or other severely affected industries) not persist for longer than is necessary in view of its mplications for competition and the functioning of the EU Single Market. National strategies for a return to fiscal sustainability should be coordinated as well, for which a framework exists in the form of the Stability and Growth Pact which was designed to tackle spillover risks from the outset. The rationales for the coordination of structural policies have been spelled out in the Lisbon Strategy and apply also to the exits from temporary intervention in product and labour markets in the face of the crisis. Ã¢â‚¬ ¢ At the crisis prevention stage the rationale for EU coordination is rather straightforward in view of the high degree of financial and economic integration.For example, regulatory reform geared to crisis prevention, if not coordinated, can lead to regulatory arbitrage that will affect location choices of institutions and may change the direction of international capital flows. Moreover, with many financial institutions operating cross border there is a 3. A STRONG CALL ON EU COORDINATION The rationale for EU coordination of policy in the face of the financial crisis is strong at all three stages Ã¢â‚¬â€œ control and mitigation, resolution and prevention: Ã¢â‚¬ ¢ At the crisis control and mitigation stage, EU policy makers became acutely aware that financial assistance by home countries of their financial institutions and unilateral extensions of deposit guarantees entail large and potentially disrupting spillover effects. This led to emergency summits of the European Council 5European Commission Economic Crisis in Europe: Causes, Consequences and Responses clear case for exchange of information and burden sharing in case of defaults. The financial crisis has clearly strengthened the case for economic policy coordination in the EU. By coordinating their crisis policies Member States heighten the credibi lity of the measures taken, and thus help restore confidence and support the recovery in the short term. Coordination can also be crucial to fend off protectionism and thus serves as a safeguard of the Single Market. Moreover, coordination is necessary to ensure a smooth functioning of the euro area where spillovers of national policies are particularly strong.And coordination provides incentives at the national level to implement growth friendly economic policies and to orchestrate a return to fiscal sustainability. Last but not least, coordination of external policies can contribute to a more rapid global solution of the financial crisis and global recovery. EU frameworks for coordination already exist in many areas and could be developed further in some. In several areas the EU has a direct responsibility and thus is the highest authority in its jurisdiction. This is the case for notably monetary policy in the euro area, competition policy and trade negotiations in the framework of the DOHA Round. This is now proving more useful than ever. In other areas, Ã¢â‚¬Ëœbottom-up' EU coordination frameworks have been developed and should be exploited to the full.The pursuit of the regulatory and supervisory agenda implies the set-up of a new EU coordination framework which was long overdue in view of the integration of financial systems. An important framework for coordination of fiscal policies exists under the aegis of the Stability and Growth Pact. The revamped Lisbon strategy should serve as the main framework for coordination of structural policies in the EU. The balance of payment assistance provided by the EU is another area where a coordination framework has been established recently, and which could be exploited also for the coordination of policies in the pursuit of economic convergence. At the global level, finally, the EU can offer a framework for the coordination of positions in e. g. the G20 or the IMF.With the US adopting its own exit strategy, press ure to raise demand elsewhere will be mounting. The adjustment requires that emerging countries such as China reduce their national saving surplus and changed their exchange rate policy. The EU will be more effective if it also considers how policies can contribute to more balanced growth worldwide, by considering bolstering progress with structural reforms so as to raise potential output. In addition, the EU would facilitate the pursuit of this agenda by leveraging the euro and participating on the basis of a single position. 6 Part I Anatomy of the crisis 1. 1. 1. ROOT CAUSES OF THE CRISIS INTRODUCTIONThe depth and breath of the current global financial crisis is unprecedented in post-war economic history. It has several features in common with similar financial-stress driven crisis episodes. It was preceded by relatively long period of rapid credit growth, low risk premiums, abundant availability of liquidity, strong leveraging, soaring asset prices and the development of bubbles in the real estate sector. Stretched leveraged positions and maturity mismatches rendered financial institutions very vulnerable to corrections in asset markets, deteriorating loan performance and disturbances in the wholesale funding markets. Such episodes have happened before and the examples are abundant (e. g.Japan and the Nordic countries in the early 1990s, the Asian crisis in the late-1990s). But the key difference between these earlier episodes and the current crisis is its global dimension. When the crisis broke in the late summer of 2007, uncertainty among banks about the creditworthiness of their counterparts evaporated as they had heavily invested in often very complex and opaque and overpriced financial products. As a result, the interbank market virtually closed and risk premiums on interbank loans soared. Banks faced a serious liquidity problem, as they experienced major difficulties to rollover their short-term debt. At that stage, policymakers still perceived the c risis primarily as a liquidity problem.Concerns over the solvency of individual financial institutions also emerged, but systemic collapse was deemed unlikely. It was also widely believed that the European economy, unlike the US economy, would be largely immune to the financial turbulence. This belief was fed by perceptions that the real economy, though slowing, was thriving on strong fundamentals such as rapid export growth and sound financial positions of households and businesses. These perceptions dramatically changed in September 2008, associated with the rescue of Fannie Mae and Freddy Mac, the bankruptcy of Lehman Brothers and fears of the insurance giant AIG (which was eventually bailed out) taking down major US and EU financial institutions in its wake.Panic broke in stock markets, market valuations of financial institutions evaporated, investors rushed for the few safe havens that were seen to be left (e. g. sovereign bonds), and complete meltdown of the financial system b ecame a genuine threat. The crisis thus began to feed onto itself, with banks forced to restrain credit, economic activity plummeting, loan books deteriorating, banks cutting down credit further, and so on. The downturn in asset markets snowballed rapidly across the world. As trade credit became scarce and expensive, world trade plummeted and industrial firms saw their sales drop and inventories pile up. Confidence of both consumers and businesses fell to unprecedented lows. Graph I. 1. : Projected GDP growth for 2009 6 4 2 0 -2 -4 Nov-07 CF-NMS EC-NMS Jan-08 May-08 Mar-08 CF-UK EC-UK Jul-08 Sep-08 CF-EA EC-EA Nov-08 Jun-09 Aug-09 Aug-10 % -4. 0 -4. 3 Oct-09 Oct-10 -6 Feb-09 Sources: European Commission, Consensus Forecasts Graph I. 1. 2: Projected GDP growth for 2010 6 4 2 0 -2 -4 Nov-08 CF-NMS EC-NMS Jan-09 May-09 Mar-09 CF-UK EC-UK Jul-09 Sep-09 CF-EA EC-EA Dec-09 Feb-10 Jun-10 Apr-10 % -6 Sources: European Commission, Consensus Forecasts This set chain of events set the scene fo r the deepest recession in Europe since the 1930s. Projections for economic growth were revised downward at a record pace (Graphs I. 1. 1 and I. 1. 2).Although the contraction now seems to have bottomed, GDP is projected to fall in 2009 by the order of 4% in the euro area and the European Union as whole Ã¢â‚¬â€œ with a modest pick up in activity expected in 2010. 8 Apr-09 Part I Anatomy of the crisis The situation would undoubtedly have been much more serious, had central banks, governments and supra-national authorities, in Europe and elsewhere, not responded forcefully (see Part III of this report). Policy interest rates have been cut sharply, banks have almost unlimited access to lender-oflast-resort facilities with their central banks, whose balance sheets expanded massively, and have been granted new capital or guarantees from their governments.Guarantees for savings deposits have been introduced or raised, and governments provided substantial fiscal stimulus. These actions giv e, however, rise to new challenges, notably the need to orchestrate a coordinated exit from the policy stimulus in the years ahead, along with the need to establish new EU and global frameworks for the prevention and resolution of financial crises and the management of systemic risk (see Part III). that point most observers were not yet alerted that systemic crisis would be a threat, but this began to change in the spring of 2008 with the failures of Bear Stearns in the United States and the European banks Northern Rock and Landesbank Sachsen.About half a year later, the list of (almost) failed banks had grown long enough to ring the alarm bells that systemic meltdown was around the corner: Lehman Brothers, Fannie May and Freddie Mac, AIG, Washington Mutual, Wachovia, Fortis, the banks of Iceland, Bradford & Bingley, Dexia, ABN-AMRO and Hypo Real Estate. The damage would have been devastating had it not been for the numerous rescue operations of governments. When in September 2008 L ehman Brothers had filed for bankruptcy the TED spreads jumped to an unprecedented high. This made investors even more wary about the risk in bank portfolios, and it became more difficult for banks to raise capital via deposits and shares. Institutions seen at risk could no longer finance themselves and had to sell assets at Ã¢â‚¬Ëœfire sale prices' and restrict their lending.The prices of similar assets fell and this reduced capital and lending further, and so on. An adverse Ã¢â‚¬Ëœfeedback loop' set in, whereby the economic downturn increased the credit risk, thus eroding bank capital further. The main response of the major central banks Ã¢â‚¬â€œ in the United States as well as in Europe (see Chapter III. 1 for further detail) Ã¢â‚¬â€œ has been to cut official attributed to a common systemic factor (see for evidence Eichengreen et al. 2009). 1. 2. A CHRONOLOGY OF THE MAIN EVENTS The heavy exposure of a number of EU countries to the US subprime problem was clearly revealed in the s ummer of 2007 when BNP Paribas froze redemptions for three investment funds, citing its inability to value structured products. 1 ) As a result, counterparty risk between banks increased dramatically, as reflected in soaring rates charged by banks to each other for short-term loans (as indicated by the spreads Ã¢â‚¬â€ see Graph I. 1. 3). ( 2 ) At (1) See Brunnermeier (2009). (2) Credit default swaps, the insurance premium on banks' portfolios, soared in concert. The bulk of this rise can be Bps 500 400 300 200 100 0 Jan-00 Graph I. 1. 3: 3-month interbank spreads vs T-bills or OIS Default of Lehman Brothers BNP Paribas suspends the valuation of two mutual funds Jan-01 Jan-02 EUR Jan-03 Jan-04 USD Jan-05 Jan-06 JPY Jan-07 Jan-08 GBP Jan-09 Sources: Reuters EcoWin. 9 European Commission Economic Crisis in Europe: Causes, Consequences and Responses interest rates to historical lows so as to contain funding cost of banks.They also provided additional liquidity against collateral in ord er to ensure that financial institutions do not need to resort to fire sales. These measures, which have resulted in a massive expansion of central banks' balance sheets, have been largely successful as three-months interbank spreads came down from their highs in the autumn of 2008. However, bank lending to the non-financial corporate sector continued to taper off (Graph I. 1. 4). Credit stocks have, so far, not contracted, but this may merely reflect that corporate borrowers have been forced to maximise the use of existing bank credit lines as their access to capital markets was virtually cut off (risk spreads on corporate bonds have soared, see Graph I. 1. 5). Graph I. 1. : Bank lending to private economy in the euro area, 2000-09 16 14 12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: European Central Bank institutions incentives to sell to the government while giving taxpayers a reasonable expectation that they will benefit in the long run. Financial inst itutions which at the (new) market prices of toxic assets would be insolvent were recapitalised by the government. All these measures were aiming at keeping financial institutions afloat and providing them with the necessary breathing space to prevent a disorderly deleveraging. The verdict as to whether these programmes are sufficient is mixed (Chapter III. 1), but the order of asset relief provided seem to be roughly in line with banks' needs (see again Box I. 1. ). Graph I. 1. 5: Corporate 10 year-spreads vs. Government in the euro area, 2000-09 450 350 basis points 250 150 50 -50 Corp AAA rated Corp A rated Corp composite yield Corp AA rated Corp BBB rated y-o-y percentage change house purchases households Non-financial corporations -150 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: European Central Bank. 1. 3. GLOBAL FORCES BEHIND THE CRISIS Governments soon discovered that the provision of liquidity, while essential, was not sufficient to restore a normal functionin g of the banking system since there was also a deeper problem of (potential) insolvency associated with undercapitalisation.The write-downs of banks are estimated to be over 300 billion US dollars in the United Kingdom (over 10% of GDP) and in the range of over EUR 500 to 800 billion (up to 10% of GDP) in the euro area (see Box I. 1. 1). In October 2008, in Washington and Paris, major countries agreed to put in place financial programmes to ensure capital losses of banks would be counteracted. Governments initially proceeded to provide new capital or guarantees on toxic assets. Subsequently the focus shifted to asset relief, with toxic assets exchanged for cash or safe assets such as government bonds. The price of the toxic assets was generally fixed between the fire sales price and the price at maturity to giveThe proximate cause of the financial crisis is the bursting of the property bubble in the United States and the ensuing contamination of balance sheets of financial instituti ons around the world. But this observation does not explain why a property bubble developed in the first place and why its bursting has had such a devastating impact also in Europe. One needs to consider the factors that resulted in excessive leveraged positions, both in the United States and in Europe. These comprise both macroeconomic and developments in the functioning of financial markets. ( 3 ) (3) See for instance Blanchard (2009), Bosworth and Flaaen (2009), Furceri and Mourougane (2009), Gaspar and Schinasi (2009) and Haugh et al. (2009). 10 Part I Anatomy of the crisis Box I. 1. 1: Estimates of financial market losses Estimates of financial sector osses are essential to inform policymakers about the severity of financial sector distress and the possible costs of rescue packages. There are several estimates quantifying the impact of the crisis on the financial sector, most recently those by the Federal Reserve in the framework of its Supervisory Capital Assessment Program, w idely referred to as the Ã¢â‚¬Å"stress testÃ¢â‚¬ . Using different methodologies, these estimates generally cover write-downs on loans and debt securities and are usually referred to as estimates of losses. The estimated losses during the past one and a half years or so have shown a steep increase, reflecting the uncertainty regarding the nature and the extent of the crisis.IMF (2008a) and Hatzius (2008) estimated the losses to US banks to about USD 945 in April 2008 and up to USD 868 million in September 2008, respectively. This is at the lower end of predictions by RGE monitor in February the same year which saw losses in the rage of USD 1 to 2 billion. The April 2009 IMF Global Financial Stability Report (IMF 2009a) puts loan and securities losses originated in Europe (euro area and UK) at USD 1193 billion and those originated in the United States at USD 2712 billion. However, the incidence of these losses by region is more relevant in order to judge the necessity and the extent of policy intervention. The IMF estimates write-downs of USD 316 billion for banks in the United Kingdom and USD 1109 billion (EUR 834 billion) for the euro area.The ECB's loss estimate for the euro area at EUR 488 billion is substantially lower than this IMF estimate, with the discrepancy largely due to the different assumptions about banks' losses on debt securities. Bank level estimates can be used in stress tests to evaluate capital adequacy of individual institutions and the banking sector at large. For example the Fed's Supervisory Capital Assessment Program found that 10 of the 19 banks examined needed to raise capital of USD 75 billion. Loss estimates can also inform policymakers about the effects of losses on bank lending and the magnitude of intervention needed to pre-empt this. Such calculations require additional assumptions about the capital banks can raise or generate through their profits as well as the amount of deleveraging needed.As an illustration the table below presents four scenarios that differ in their hypothetical recapitalisation rate and their deleveraging effects The IMF and ECB estimates of total write-downs for euro area banks are taken as starting points. Net write-downs are calculated, which reflect losses that are not likely to be covered either by raising capital or by tax deductions. Depending on the scenario net losses range between 219 and 406 billion EUR using the IMF estimate, and roughly half of that based on the ECB estimate. Such magnitudes would imply balance sheets decreases amounting to 7. 3% in the mildest scenario and 30. 8% in the worst case scenario (period between August 2007 and end of 2010). Capital recovery rates and deleveraging play a crucial role in determining the magnitude of the balance sheet effect.Governments' capital injections in the euro area have been broadly in line with the magnitude of these illustrative balance sheet effects, committing 226 billion EUR, half of which has been spent (see Chap ter III. 1). Table 1: Balance-sheet effects of write-downs in the euro area* Scenario (1) (2) (3) Capital 1760 1760 1760 Assets 31538 31538 31538 Estimated write-downs IMF 834 834 834 ECB 488 488 488 Recapitalisation rate 65% 65% 50% Net write-downs IMF 219 219 313 ECB 128 128 183 Decrease in balance sheet (leverage constant) IMF -12. 4% -12. 4% -17. 8% ECB -7. 3% -7. 3% -10. 4% Change in leverage ratio 0% -5% -5% Decrease in balance sheet (with delevraging) IMF -12. 4% -16. 8% -21. % ECB -7. 3% -11. 9% -14. 9% * Billion EUR, EUR/USD exchange rate 1. 33. Source : European Commission (4) 1760 31538 834 488 35% 407 238 -23. 1% -13. 5% -10% -30. 8% -22. 2% 11 European Commission Economic Crisis in Europe: Causes, Consequences and Responses As noted, most major financial crises in the past were preceded by a sustained period of buoyant credit growth and low risk premiums, and this time is no exception. Rampant optimism was fuelled by a belief that macroeconomic instability was eradicate d. The Ã¢â‚¬ËœGreat Moderation', with low and stable inflation and sustained growth, was conducive to a perception of low risk and high return on capital.In part these developments were underpinned by genuine structural changes in the economic environment, including growing opportunities for international risk sharing, greater stability in policy making and a greater share of (less cyclical) services in economic activity. Persistent global imbalances also played an important role. The net saving surpluses of China, Japan and the oil producing economies kept bond yields low in the United States, whose deep and liquid capital market attracted the associated capital flows. And notwithstanding rising commodity prices, inflation was muted by favourable supply conditions associated with a strong expansion in labour transferred into the export sector out of rural employment in the emerging market economies (notably China).This enabled US monetary policy to be accommodative amid economic bo om conditions. In addition, it may have been kept too loose too long in the wake of the dotcom slump, with the federal funds rate persistently below the Ã¢â‚¬ËœTaylor rate', i. e. the level consistent with a neutral monetary policy stance (Taylor 2009). Monetary policy in Japan was also accommodative as it struggled with the aftermath of its late-1980s Ã¢â‚¬Ëœbubble economy', which entailed so-called Ã¢â‚¬Ëœcarry trades' (loans in Japan invested in financial products abroad). This contributed to rapid increases in asset prices, notably of stocks and real estate Ã¢â‚¬â€œ not only in the United States but also in Europe (Graphs I. 1. 6 and I. 1. 7).A priori it may not be obvious that excess global liquidity would lead to rapid increases in asset prices also in Europe, but in a world with open capital accounts this is unavoidable. To sum up, there are three main transmission channels. First, upward pressure on European exchange rates vis-a-vis the US dollar and currencies with de facto pegs to the US dollar (which includes inter alia the Chinese currency and up to 2004 also the Japanese currency), reduced imported inflation and allowed an easier stance of monetary policy. Second, so-called Ã¢â‚¬Å"carry tradesÃ¢â‚¬ whereby investors borrow in currencies with low interest rates and invest in higher yielding currencies while mostly disregarding exchange rate risk, implied the spillover of global liquidity in European financial markets. 4 ) Third, and perhaps most importantly, large capital flows made possible by the integration of financial markets were diverted towards real estate markets in several countries, notably those that saw rapid increases in per capita income from comparatively low initial levels. So it is not surprising that money stocks and real estate prices soared in tandem also in Europe, without entailing any upward tendency in inflation of consumer prices to speak of. ( 5 ) Graph I. 1. 6: Real house prices, 2000-09 190 180 170 160 150 140 130 120 110 100 90 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Index, 2000 = 100 United States United Kingdom Source: OECD euro area euro area excl. Germany 500 400 300 200 100 0 03. 01. 00 12. 10. 00 Graph I. 1. 7: Stock markets, 2000-09 300 200 100 0 27. 07. 01 14. 05. 02 25. 02. 03 05. 12. 03 22. 09. 04 05. 07. 05 12. 04. 06 25. 1. 07 07. 11. 07 22. 08. 08 DJ EURO STOXX (lhs) Source: www. stoxx. com DJ Emerging Europe STOXX (rhs) Aside from the issue whether US monetary policy in the run up to the crisis was too loose relative to the buoyancy of economic activity, there is a broader issue as to whether monetary policy should lean against asset price growth so as to prevent bubble formation. Monetary policy could be blamed Ã¢â‚¬â€œ at both sides of the Atlantic Ã¢â‚¬â€œ for (4) See for empirical evidence confirming these two channels Berger and Hajes (2009). (5) See for empirical evidence Boone and Van den Noord (2008) and Dreger and Wolters (2009). 12 Part I Anatomy of the crisis cting too narrowly and not reacting sufficiently strongly to indications of growing financial vulnerability. The same holds true for fiscal policy, which may be too narrowly focused on the regular business cycle as opposed to the asset cycle (see Chapter III. 1). Stronger emphasis of macroeconomic policy making on macro-financial risk could thus provide stabilisation benefits. This might require explicit concerns for macro-financial stability to be included in central banks' mandates. Macro-prudential tools could potentially help tackle problems in financial markets and might help limit the need for very aggressive monetary policy reactions. 6 ) Buoyant financial conditions also had microeconomic roots and the list of contributing factors is long. The Ã¢â‚¬Ëœoriginate and distribute' model, whereby loans were extended and subsequently packaged (Ã¢â‚¬Ëœsecuritised') and sold in the market, meant that the creditworthiness of the borrower was no longer assessed by the originator of the loan. Moreover, technological change allowed the development of new complex financial products backed by mortgage securities, and credit rating agencies often misjudged the risk associated with these new instruments and attributed unduly triple-A ratings. As a result, risk inherent to these products was underestimated which made them look more attractive for investors than warranted.Credit rating agencies were also susceptible to conflicts of interests as they help developi

Tuesday, July 30, 2019

The Fashion of Warriors

Memoirs off Secret Empire . Samurai I PBS Search Support for PBS. Org provided by: What's this? Sam aura warriors me urged as an elite force in Japan's prop inches during the early 1 20th century . Recruited by local chieftains, these fighting forces were m maintained long enough to wage a specific war, after which the soldiers would return to their lands to till the soil. With Japan's me proper live ins in the ancient capital of Ky tot and unable to m maintain control of the prop inches, the Sam aura clans established them sell sees as v table political entities.By the late 1 2 the century , Sam aura lords ruled both the prop inches and central Japan. They m maintained their influence until the m id-1 87 g's when the Sam aura class was outlawed and their privy ledge status was dissolve deed. Samurai warriors were at the top of the social order CASTE POSITION The Sam aura class, Ã¢â‚¬Å"shim in,Ã¢â‚¬ form deed Japan's top elite, and were the only caste granted the privy liege of wea ring two swords and have ins two name sees?a fame ill and a first name e.The shoguns and Adam y o lords were m me beers of the shim in caste. THEN & NOW Modern Japan still m maintains a culture based on the incepts of 1/3 The rigorous training of a Sam aura warrior began in childhood. Sam aura school was a unique com abomination of pay sisal training, Chinese studies, poetry and spiritual discipline. The y nouns warriors studied Keno (Ã¢â‚¬Å"the Way of the SwordÃ¢â‚¬ ), the m oral code of the Sam aura, and Zen www. PBS. Org/empires/Japan/entered_8. HTML Buddhism .Sam aura were expected to live e according to Bushier (Ã¢â‚¬Å"The Way of the WarriorÃ¢â‚¬ ), a strict ethical code influenced by Confucianism that stressed LOL alt to one's m aster, respect for one's superior, ethical behave ROR in all aspects of life and mom plate self-discipline. Girls also receive deed m arterial arts training. Although m cost Sam aura whom en did not fight on the battlefield, they were prepared to def end their homo sees against NV adders. The Sam aura attached great IM portable to the circus stances of their own death.If a Sam aura died of his own accord, it was considered a v Lillian end. Rather than suffer defeat or hum location at the hands of an enema y , Sam aura warriors often chose ritual suicide (speedup). After Outgas lye ass united Japan, Sam aura m litany serve ices were rarely needed. Though they continued to train daily , Sam aura gradually transform deed from warriors to bureaucrats. As townspeople acquired new wealth, the Sam aura, barred from engaging in com m race, found them sell sees in dire circus stances. For m any Sam aura, peace led to despair. Nor and sham e, funded mental to the Sam aura code. Sam aura warriors took great care sty ling their hair, which they pulled back into a topknot called a Ã¢â‚¬Å"chomp age. Ã¢â‚¬ For battle, Sam aura warriors shave deed the tops of their heads, which reduced the heat under their heave y helm test, and ore their hai r straight on the sides. When not wearing helm test, they pulled the side and back hair into a topknot. A Sam Uri's clothing sty el was v ere IM portent and indicative e of status. Outlandish, colorful patterns were considered IM m oddest and conceited.Though Sam aura children dressed flam boy antsy , they became e m ore subdued in appearance after their com ins-of-age Ceres non . The Sam Uri's eve ere day wear was a Kim non, usually consisting of an outer and inner lay ere. Norm ally m add of silk, the quality of the Kim non depended on the Sam Uri's income e and status. Beneath the Kim non, the warrior wore a loincloth. The Sam Uri's swords were norm ally thrust through an Ã¢â‚¬Å"Obi,Ã¢â‚¬ a belt wrapped around the waist, and were always s worn on the left side.

Monday, July 29, 2019

Relection writing refer to group work in legal skills course Essay

Relection writing refer to group work in legal skills course - Essay Example Most importantly, they must work closely with the clients they serves. Therefore I see the need to rise above myself and learn to interact with people. As I join a student firm, I know that I can perform various tasks like collaborating with others to reach certain goals, share information, and cultivate relationships. Following the Belbin theory on Team Roles, I know that I can also determine my distinctive contribution to my group, and at this moment I feel my giving stress to being an implementer, a vital cog in team work. Last year was my freshman yearÃ¢â‚¬â„¢s first encounter with a group. I recall how I tried to find a place in my student firm. We did various tasks which taught me a lot, particularly in making concrete the abstract legal skills learned through readings and lectures. However, I think that we could have done better, achieved desired outcomes such as in exercises in doing interviews and negotiating with other firms. But there were behavioural difficulties in the t eam. Of course, theorists on organizational behaviour like Keith Davis say that no one can be totally blamed for failures in an organizational setting. Team efforts, he noted, result in team results. And so, I think this was precisely our main difficultyÃ¢â‚¬â€we were not fully a team. Individually, we were too conscious of protecting our self image and self esteem. And feeling threatened by problems which faced us, teamwork did not fully surface. Of course, the desirable outcomes could have been achieved. And Davis says conflicts should not be bad at all for organized groupings. It can stir a search for approaches to get the desired results, also allow problems to become more crystal clear so that these can be faced and resolved. But this was not the case last year. Our conflicts caused the issues to become muddled. We could not face what were unknown and so we could not fully resolve them. In my joining a group this year, my team members and myself seemed better prepared for team building and team success. In spite of the failure of most firms during freshman year, there is a common agreement among my classmates that we are no longer greenhorns this year. We can learn from whatever mistakes we made, and build on the failures last year. Naming our firm came to my group as the great test to the social process of group dynamics which we were tasked to do. And we were prepared this time to forming a firm with scientific tools for learning the different roles we can play. We also assumed different kinds of leadership which can be listed under the Belbin theory of Team Roles namely: as Plant, Monitor Evaluator, Coordinator, Resource Inventory Communicator, Implementer, Complete Finisher, Team workers, Shaper or Specialist. And through our group interactions, we disproved a mathematical logic by showing that Ã¢â‚¬Å"two plus two equals three.Ã¢â‚¬ Our firm did have individual members who can be singly counted and added to form the whole team. However, our relatio nship was an added factor to count such that the team, aside from the individuals, was an additional count. Of course, I have much to thank my group members, especially our chairperson who proved to be an able Coordinator. He led us to focus together on work objectives, drew out our individual strengths, and delegated work. Reflecting on myself as being naturally silent and shy, my Coordinator delegated me with tasks which I could well perform. More importantly, the whole team gave me a listening ear and accepted my

Sunday, July 28, 2019

Basic Network Technology, Structure, and Protocols Research Paper - 1

Basic Network Technology, Structure, and Protocols - Research Paper Example Moreover, the Internet is known as the worldÃ¢â‚¬â„¢s biggest public WAN and it is too a type of network (Mitchell, 2011) and (FREETECHEXAMS, 2011). There are diverse kinds of networking, for example there are WANs (wide area networks) or LANs (local area networks). However, the dissimilarity among these two depends on their coverage. Additionally, networks can as well be dissimilar in their arrangement and design. In addition, there are various other types as well for instance server/client networks and peer-to-peer networks. Moreover, in some scenarios client/server based networks are inclined to be central by means of the majority processes being maintained by the centralized or key system. On the other hand, the Peer-to-peer networks are composed of computers that facilitate the similar processes as well as are able to transmit data and information to each other (FREETECHEXAMS, 2011) and (Mitchell, 2011). The purpose of networks is to offer data sharing and communication services , for this reason there are some established communication standards those are implemented through protocols. In this scenario, the protocols are similar to the policies and regulations for the processes of the network. In addition, a network can use different protocols depending on the situation, for example TCP/IP, the majority widespread protocol established for the communication on internet as well as in small level networks. Moreover, the networks can be classified as wireless or wired networks. In this scenario, the majority of protocols intended for wired networks are as well facilitated and corroborated by wireless networks. Furthermore, wired networks have been established a long time ago as compared to wireless networks. However, with developments in technology wireless networks are improving and turning out to be more widespread and trustworthy (FREETECHEXAMS, 2011) and (Mitchell, 2011). At the present, networks are used everywhere. From our home telephone lines to TV con nection we are surrounded with communication networks. These networks are able to offer us a lot of facilities and services in form of information and data sharing. On the other hand, majority of the people still do not have any knowledge about the network technology and what are the basic skills behind the scene. In this scenario, there is an awful need of educating people about the network technology and teaching people about this technology based system. For this purpose, TV and internet are the prime means of technology based communication. In addition, through these means we communicate with people as well as transfer data and information. Moreover, we can develop a program based on the presentation which can offer a great deal of support regarding information sharing and data distribution at the network level for guiding the people (FREETECHEXAMS, 2011), (Nash, 2000) and (Mitchell, 2011). However, there are some issues associated with each technology. In the same way, the late st network technologies are also experiencing some of the issues those are hindering in the overall progress and possible evolution of the technology. In this scenario, security in case of network environment is taken as one of the prime factors regarding the network technology and communication. Moreover, these issues become more critical in

Saturday, July 27, 2019

Hypothetical Research Designs Paper Example | Topics and Well Written Essays - 1000 words

Hypothetical Designs - Research Paper Example The researcher states that in a research study, a good hypothesis is considered to have such opportunities, which will help to uncover new ideas or knowledge for the researcher. If the researcher does not learn something new by the hypothesis developed with the help of research questions, then it would be futile. There are three types of research design; they are qualitative, quantitative and mixed methods. The quantitative and qualitative designs are not the extreme opposite form of research designs; rather they represent different areas of research. The mixed research method is the combination of both the methods, so it balances both. The general difference between qualitative and quantitative hypothesis is that the qualitative hypothesis includes closed-ended questions and quantitative hypothesis includes the use of numbers. The qualitative hypothesis includes exploring the social and human behavior in relation to the problem areas. The quantitative research method deals with test ing the problems by analyzing the numbers, statistics or financial reports. It is logical and can help the researcher to prove his/ her results logically. The mixed method combines the philosophical assumptions as well as the facts and figures. There are two components that can be involved while developing a research design that is the philosophical assumptions and the distinct procedure. The philosophical assumptions include the worldwide study that has been conducted on the problems or topic and the distinct procedure involves the type of hypothesis used to develop the research design.

Friday, July 26, 2019

Acid Ratios Essay Example | Topics and Well Written Essays - 1000 words

Acid Ratios - Essay Example The current ratio uses total current assets and total current liabilities. Total current assets are divided by total current liabilities to give the current ratio. Meanwhile, acid test ratio is found by the use of total current assets, total current liabilities, and inventory. The equation for the quick ratio is inventory taken away from total current assets and divided by total current liabilities. 1. In order to work out the current ratio for Thingamajigs and Things, we first need to find out the components of the equation so we can calculate the current ratio. Thingamajigs and ThingsÃ¢â‚¬â„¢ total current assets are worth $45,000, and their total current liabilities are $9,000. If we divide the total current assets by the total current liabilities then we get a ratio of exactly 5 (Lane, 2011). In looking at WannaBees, we can see that they have total current assets of $150,000 and total current liabilities of $85,000. Once we conduct the calculation for the current ratio, we get a figure of 1.76 (Lane, 2011). In determining what these numbers mean, we first have to judge what figure is an acceptable figure to have. The current ratio should not go below 1 or else the company should be concerned (Kennon, 2011). In general, a high current ratio shows that the business has sufficient amounts of cash on hand and cannot be considered a financial risk. In this case, Thingamajigs and Things has a much higher current ratio than WannaBees. If both of these companies were applying for a bank loan, Thingamajigs and Things would be more likely to receive it. 2. Thingamajigs and ThingsÃ¢â‚¬â„¢ total current assets are $45,000, its total current liabilities are $9,000, and its inventory is worth $30,000. If we conduct an acid test ratio, we come up with a figure of 1.67 (Lane, 2011). On the other hand, WannaBees has total current assets of $150,000, total current liabilities of $85,000, and an

Thursday, July 25, 2019

Secondary study on any current public health issue - Obesity Statistics Project

Secondary study on any current public health issue - Obesity - Statistics Project Example If found at the beginning, one should take care of his/health by reducing the weight by taking less calorific food and doing aerobic exercises / yoga regularly. From all the above tables and chart, it is concluded that the White non-hispanic youths are less obese (Mean BMI=23.49) compared to Hispanic group youths (Mean BMI=27.56) or black non-hispanic group youths (Mean=34.95). The black non-hispanic groups are over obese compared to their counterparts in Hispanic or white non-hispanic groups. The ANOVA is also showing highly significant F value which indicates that there is a very highly significant difference in BMI between the three ethnic groups. The correlation coefficient between white non Hispanic and black non Hispanic is positive and significant at 1% and 5% levels, the correlation coefficients between Hispanic and white non-hispanic is positive and significant at 5% level only where as there is no correlation between black non-hispanic and Hispanic

Placement search Essay Example | Topics and Well Written Essays - 250 words

Placement search - Essay Example Job specifications of the identified opportunities identified my employability skills. Some of the major employability skills, according to Wilczenski and Coomey (2007, p. 7), are ability and readiness to assume responsibility, intra-personal competence, inter-personal competence, and moral competence. These were common competencies in each of the job specifications and understanding my competencies in these informed me of a recommended level of my employability skills. Self-assessment and peer comments on my personality informed my opinion on my personal competencies. I chose to abandon my search because of time and resource scarcity. Placement requires a year but I plan to register for my masters program immediately after my current program. This means I shall not be able to afford a whole year for placement. In addition, plans for the masters program has also constrained my financial resources and makes participation in the placement, even on private time basis, impossible. My placement search was therefore successful and helped me identify my employability potential. I however abandoned the search because of my plans for a masterÃ¢â‚¬â„¢s program and scarcity of time and

Wednesday, July 24, 2019

Counseling Needs Essay Example | Topics and Well Written Essays - 500 words

Counseling Needs - Essay Example The diagram on the next page illustrates the framework to be followed by me as the counsellor. The figure shows the interrelationship between the client and the counsellor, within the content and process influences that impact upon the individual, with the collaboration and intervention of the counsellor. I should work closely with policy makers in the organization, based on the theory by Savickas, Van Esbroeck and Herr that career guidance is a socio-political instrument for advancing organizational goals while helping the individual to realize a personally satisfying career (Patton & McMahon, 2006:231). The policy makers set the organizational system, which functions inside the social and environmental/societal systems. Working in the system side by side with the individual is the counsellor, who uses a collaborative and negotiating technique that makes up the pro-active approach. The counsellor finds out the policies and objectives in the organization, and helps the individual to adjust to the constantly changing organization.

Tuesday, July 23, 2019

TERRORIST TRAINING Research Paper Example | Topics and Well Written Essays - 2000 words

TERRORIST TRAINING - Research Paper Example Over the years, numerous worldwide campaigns have been launched with the aim of fighting terrorism. Terrorist training has been continuously propagated by extremists such as Osama bin Laden and Ayman al-Zawahiri. They are said to be the leadership and minds behind Taliban and Al Qaeda. These terror groups expanded their terror activities by establishing terror training camps in Afghanistan and other regions of the world. Terror training can be blamed for the deadly terror attacks that have been carried out in Europe, USA and other regions of the world. One of the most common of these terror attacks include the 9/11 attacks in the USA. The main aim of this paper is to help readers to understand the way in which terrorist training and recruitment has shifted, changed and evolved over the past decade. Terrorist Training Although there are many issues that define the way in which the world seeks to counteract or avert terrorism, one of the primal means by which governments can seek to di srupt terrorism is by seeking to interfere or stymie the means by which terrorist groups train and/or recruit new members. Ultimately, nations such as the United States have made it a primary goal of its intelligence and/or military to seek to disrupt or destroy terrorist training facilities and capabilities at each and every juncture. In such a way, many analysts have noted that this process in and of itself is more effective in helping to stem the tide of terrorism than targeted assassinations of high ranking terrorists. Nonetheless, when performed in tandem with other actions, seeking to disrupt and destroy terrorist training capabilities comes to be seen as an effective tool in the arsenal of counter terrorism agencies and governments the world over. As a result of the relatively high level of success that the United States and other nations have experienced with regards to depriving these entities of their training capabilities, groups such as Al Qaeda and others have been forc ed to integrate with new dynamics. As such, these new dynamics in terrorist training will be the primal thrust and unit of analysis within this brief research paper. In seeking to understand the way in which terrorist training and recruitment has shifted over the past decade, the reader can come to a more appreciable level of understanding with regards to how these entities continue to be represented within the world. Looking back but a few short years, the reader can note that a far different system existed as compared to what is evidenced now. Taking Al Qaeda as the case in question, it can be noted that there existed defined and extant philosophy of integration with regards to the way in which training facilities existed in and around the globe. What is meant by this is that Al Qaeda operated a litany of different physical training facilities in far flung reaches of the globe to include Somalia, Afghanistan, Sudan, the Philippines and others. Up until the attacks of September 11t h, 2001, these training bases served as the backbone by which newly recruited warriors would learn the basics of how to engage in Al QaedaÃ¢â‚¬â„¢s definition of jihad. It should be understood at this particular juncture that although Al Qaeda represents one of the most salient threats and perhaps one of the best known terrorist entities within the world today, it should not be understood that this group alone

Monday, July 22, 2019

Safe Travel Essay Example for Free

Safe Travel Essay Modern life is impossible without traveling. First of all, in towns or cities the majority of us are committed by trips to school and work every day. For some people itÃ¢â‚¬â„¢s a real travelling to get from the house to work. They are going by the underground, then by bus or by taxi. Occasionally we have to go to other city or country on businesses. After a year of hard work, people receive a holiday, and they do not like to spend it sitting at home. Millions of people all over the world spend their holiday travelling. They travel to see other countries and continents, modern cities and ruins of ancient cities, to enjoy picturesque landscapes or just to change the situation. It is always interesting to discover the new, to see, how different the life can be, to meet new people, to try unusual dishes, to hear unfamiliar musical rhythms. Most travelers and holiday-makers take a camera with them and take pictures of everything that interests them the sights of a city, old churches and castles views of mountains, lakes, valleys, plains, waterfalls, forests, different kind of trees, birds, plants and animals. For those who live in the country, it is pleasant to go to a big city and to spend time, visiting museums and artistic passageways, examining storefronts and having dinner at exotic restaurants. City dwellers usually like quiet holiday at sea or in the mountains, when it is not necessary to do anything, except walking, bathing and idling, lying on a beach. Those who are going travel on business or for pleasure, have at their disposal various means of transport. The fastest one is the plane. ItÃ¢â‚¬â„¢s better to book tickets in advance. In the very day you go to the airport by car. Soon you will be sitting in a big plane, and it will bring you to new lands. Sitting in a plane, you can look around yourself. The pilot and the crew are in the front cabin. Passengers can relax in comfortable seats. (944 words) Air Travel Q: Air travel only brings advantages to the rich people. But the majority of people do not benefit from it. To what extent do you agree? The proliferation of air technology has changed our world, air travel is one of the most welcome transport type. There is a viewpoint that only rich people enjoy the benefits brought by air travel. I do not support this opinion. Nowadays, air transport is a part of public transportation and air travel is afforded by people. Most of the seats installed in every airliner serve the common passengers. Rich people could choose first class or business class, even though they felt more comfortable, the fly experience, safety, the convenient and time-saving brought by air travel are all the same as well as economic class. As the air plane technology is advancing and globe air transport market competition is fiercer, cheap air travel has been born which bring many benefits to public. The engineers will make air plane flying longer with less fuel-consumption, meanwhile, the competition, in the same airline, gasping more passengers, between many air companies give more choice to individuals who can choose the No. depend on their situation, specifically, such as money, time and position. On the other hand, corporate jet is too expensive to afforded by common individual. Although personal car is afforded by common family, the price of small airplane are accepted only by rich people, so that free flying is a dream that many person having. Only small part of rich people have their own airplane and air port, due to the high maintain fee. It is evident that air transport technology could be used in other field. Scientists and engineers are inventing fly cars, combined with fly abilities, the new transport which can resolve a serious problem Ã¢â‚¬â€œ traffic congestion in city. Once this product come to realistic, everyone will enjoy a cheap, fast and convenient flying experience as their wish, sound like in the film . Advantages of Travelling In our modern times, when travelling has become easier, domestic trips and foreign journeys are more popular with people. Although almost everyone is willing to participate in such events, there are still some people, who prefer staying at homes to visiting other places. What are the advantages and disadvantages of travelling? To start with, journeys are one of these kinds of entertainment, which make people feel cheerful and happy. According to many peopleÃ¢â‚¬â„¢s believes, temporary change place of living improve human well-being or even bring an excitement. Secondly, apart from being a great source of enjoyment, travelling is also a perfect way to relax. Consequently, thanks to going on trips people can forget about their problems or daily life and duties even for a while. Furthermore, journeys are claimed to broaden peopleÃ¢â‚¬â„¢s knowledge about foreign cultures. Not only can people find out more about other traditions and customs, but also learn some history, improve language skills or taste in local cuisines. Nevertheless, travelling requires a larger sum of money which is connected with transport, accommodation, food and some extra expenses. Therefore, an average man is not able to spend his money on it systematically. Moreover, trips, especially abroad journeys seem to be very tiring. It may happen that it takes many hours or has uncomfortable conditions and as a result travelers feel sleepy, exhausted or annoyed. Additionally, travelling is often associated with some kind of risk. People who visit other, extremely different nations, cannot be sure how to behave in some situations, particularly when they do not know language. Then, they can easily offend locals, even if they do not want it. On the whole, travelling has both advantages and disadvantages. Despite numerous drawbacks like high costs, tiredness and risk, it is a fantastic way to spend free time, which makes our lives more interesting.