A Brief Analysis of the Effects of Global Recession in America Toward European Firms

A global economic crash occurred between the years of 2008 and 2013. The causes of this event have been hotly debated and extensively documented by economists, mathematicians and other experts. According to a December 2nd, 2019 article by Tejvan Pettinger for economicshelp.org: “…The recession began after the 2007/08 global credit crunching led to a prolonged period of low/negative growth, rising unemployment and a period of fiscal austerity. In particular, the great recession highlighted problems within the Eurozone which experienced a double-dip recession and high unemployment.” (Pettinger, 2019)

According to several economic and statistical sources across the internet (including the famous and critically acclaimed Hollywood movie “The Big Short”), the inciting incident of the crash was a massive increase in the amount of sub-prime mortgage lending. An April 9th, 2018 article also by Pettinger outlines what the writer refers to as an “irrational exuberance” that despite the massive and obvious risk of the sub-prime mortgage lending practices, corporate figures believed that the housing prices would continue to rise, despite the fact that they did not.

It is widely known that as a result of the 2008 economic crash, millions of families were left homeless and penniless, with thousands ending up dying due to disease, malnutrition, and exposure to weather as a result of that sharp rise in homelessness. It is also well known that a small group of corporate figures figured out that they could short the entire housing market, and they made the choice to package together millions of individual home mortgages, rated very lowly in terms of their economic value, but as they were grouped together in large numbers, the large packages were able to be disguised as having a AAA credit rating, the highest rating there was. As these mortgage packages were sold off for billions, the banks which bought them experienced massive losses when they realized what they bought were worth nothing.

How did this happen? Starting around 2005, as inflation and interest rates on housing mortgages began to rise, poorer families could not maintain their mortgage payments, resulting in defaulting on loans, bankruptcy and foreclosure, which allowed the defaulted mortgages to be bought up by credit agencies for pennies on the dollar, grouped together, disguised as AAA credit rating, and sold off for far more than they were actually worth. This is how “The Big Short” happened, which allowed a few corporate figures to make billions of dollars while millions of families went hungry, homeless, and died. This economic devastation created effects that are still felt, both in America and elsewhere. The results of the 2008 economic crash created global ripple effects in England, France, Mexico, Spain, China, Germany, Greece, and elsewhere.

One such example of the effect that America’s 2008 crash had on European nations is shown in data collected on UK GDP. According to the UK Office of National Statistics’ data on UK economic growth from 2008 to 2014, the real GDP’s percent of quarterly change, England experienced a sharp drop from a positive percent change in the first economic quarter of 2008, to nearly a 1 percent negative dive in the second fiscal quarter. This free fall continued to a nearly 1.5 percent drop in the third quarter, over 2 percent in the fourth quarter, bottoming out at a negative 2.5 percent drop in the first quarter of fiscal year 2009. The data shows a recovery to negative .5 percent in second quarter 2009, and recovery experienced regular growth and dives, positive and negative GDP changes, until growth stabilizes in a positive direction, staying around .5 positive percent change and above from first quarter 2013 onward.

The economic devastation in Greece is likely the most well-known and documented. According to Pettinger (2019), the global credit crunch led to a fall in bank lending from a shortage of liquidity. Consumer and business confidence in financial institutions plummeted worldwide as exports halted and housing prices dropped across the world. Greece experienced a full on crash, despite multiple huge bailout attempts from the European Union. Greece defaulted on loans in the billions, had a completely devalued currency, and had no real ability to produce positive GDP numbers, or pay back the massive loans.

The centralization of European countries’ currency with the Euro created a problem with overvalued exchange rates and high-yield bonds. Housing prices and house building spiked in countries such as Ireland and Spain, correlating with an increase in bank lending, but without a corresponding increase in inflation or wages in many countries. Irish housing prices and building rates fell in 2008 along with England, but never recovered as highly as England’s did. Irish housing prices bottomed out around a negative 20 percent in 2009, and topped out around negative 10 percent in 2010, while England bottomed out around negative 18 percent in 2009, but topped out at positive 10 percent in 2010. Irish housing prices were far lower, and a higher rate of house building resulted in a drop in Irish housing value.

In summary, global attempts at austerity policies in multiple nations (politically conservative financial policies aimed at reducing national expenditures) which were implemented in the hopes of staving off the economic crash actually exacerbated it, compounding the free fall. Despite corporate confidence in global housing markets and deliberate bad quality loans, global markets did not recover for years.