The European Stability Mechanism and the Future of Financial Markets

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The Financial Stability Scheme or the Financial Stability Program, otherwise known as the Eurozone, is an attempt by the European Union to assist its member states in rebuilding their financial systems. 

The European Union is made up of twenty-six countries and consists of the European Union, European Central Bank (ECB), European Union countries, the Nordic region, and several other small countries. The idea behind the Single Currency System is to provide a uniform payment system in order to promote monetary growth throughout the European Union. To do this, each country sets its own interest rates andates the various legal obligations that pertain to its currency. People interested in this field would love to hear more detailed information about it. It will be a great topic to discuss in the podcast. Have a spotify account and want more visibility? The easiest way is to buy soundcloud plays.

Many people are afraid of the possible effects that a break down of the monetary union may cause. 

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The fears of these people are not entirely unjust; the last several years have shown how much the value of the Eurozone has fallen. In addition to being prone to political turmoil, the euro has also suffered the inflationary effect of Germany’s perpetually rising consumer price index. If the rest of the developed world can experience these issues, then no one needs to wonder why the UK, the Eurozone, and Italy could be facing financial problems while the United States and Japan are seemingly on the road to recovery.

For the time being, the only thing that Europe can do in order to solve its problems is to allow the Single Currency System to operate as smoothly as possible. As long as this plan is in place, it is believed that the problems facing the EU will be limited. Italy and the UK are two of the most powerful countries in the world, so it wouldn’t be surprising if they had successful negotiating mandates from their respective European Union governments. 

The Eurozone focuses on trying to reformulate its legal framework in order to prevent future financial crises. 

The plan is also expected to improve the functioning of its monetary union by creating a European Investment Fund, making up for the loss of European financial liquidity after the breakup of the Bretton Woods system.

Meanwhile, the German government is banking on the fact that the rest of the European Union will eventually come to an agreement regarding the current state of the single currency system. If Germany is right and the rest of the continent thinks that the UK and Italy’s demands for monetary cooperation are excessive, then the UK will find that its demands will ultimately be ignored. 

On the other hand, the rest of the continent may decide that the Single Currency System has reached its limit, and it will start looking for a new system instead of trying to accommodate the Germans. If the rest of the continent acts jointly, then there is a great chance that the euro crisis will gradually begin to subside.

The single currency system will continue to suffer until some type of serious political crisis occurs. 

The individuals who believe so, also believe that the failure of the UK and Italy to come to an agreement with the Germans means that the single currency system will be unsustainable, and eventually the European Central Bank will have to print more currency in order to keep the common market from collapsing. The Central Banks of both the UK and Italy have kept interest rates low in an attempt to support the euro. However, this policy has been unpopular with bond markets, and this policy will not last forever. In addition to this, the recent news that the Central Banks of both the UK and Italy are considering buying government bonds in an effort to keep the euro area financial system viable, suggests that the chances of a financial crisis are increasing.

This increase in the chances of a crisis has prompted the European Central Bank to purchase a large amount of official Greek debt at a time when the banking system of the UK and Italy is still fragile. 

The decision to buy Greek sovereign bonds was due to the need for the Central Bank to provide additional assistance to the failing banks of Italy and the UK. 

Italy has the most immediate problems, with the loss of 60 billion euro in assets. If the situation in Italy worsens, then the effects of the bad economic news on the rest of the European continent would be felt in the form of higher interest rates across the board, and higher borrowing costs from the governments. In turn, this would mean lower incomes for Italian citizens.

Both the UK and Italy need the support of the Single Currency Super State in order to maintain financial stability. 

This is why both governments are looking for ways to bolster the bond market between them, by providing common interest rates across the board. In the UK, this means setting up an independent institution, the Bank of England, to keep the base interest rates and inflation rates low. The European Stability Mechanism, or the ESM, which is a permanent part of the European Union’s internal market, was set up to provide monetary stimulus to the eurozone countries. It is an unwise decision to remove this support from the system however, as a result of the growing risks posed by a weak currency area. In an environment where a weak currency could lead to more deflation, the effect of the ESM on the economies of the UK and Italy could be devastating.

The European Central Bank has been pressured into buying non-performing debt in the eurozone. 

Although this policy is proving unpopular, it is the only way to raise interest rates for a relatively short period of time. The European Central Bank’s plan to pump more money into the system, known as Quantitative Easing, is already having a detrimental effect on the markets, with numerous adverse effects being felt across the board. If the European Central Bank does decide to hike up interest rates, it will do so, and the outcome of that decision will largely depend on the strength of the pound and the confidence that exists in the UK and Italian governments.

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