US Financial Crisis & EU Trade Agreements Impact
US Crisis: Origins and Impact
The global financial crisis began with the burst of the American housing bubble. Similar to Spain, the US experienced readily available credit fueled by large inflows of foreign funds and low interest rates, initially intended to support the American economy after the 9/11 attacks and the dot-com bubble burst. This credit availability led to increased lending for housing, even with relaxed loan standards. Rising housing prices further fueled the perception of a secure investment, with the common belief that house prices would not fall.
Banks did not retain these mortgages; instead, they were embedded in complex financial products that transferred the risk.
The Spread of the Crisis
This issue quickly spread to banks that had acquired these financial products, initially rated as safe, but ultimately proving to be high-risk. Many banks faced significant risk. This not only severely impacted the financial sector but also affected individuals who had taken out mortgages they could no longer afford.
Some of these mortgages were second mortgages (re-financing), allowing individuals to borrow for consumption using their house as collateral. Government-sponsored companies like Freddie Mac and Fannie Mae, under pressure to increase market share, relaxed their standards and assumed more risk. This risk was passed on to insurance companies, which created investment products incorporating these “subprime” mortgages.
While individual borrowers acted irresponsibly, much criticism has been directed at the companies involved and the deregulatory practices that enabled the situation.
Economic Consequences
The crisis resulted in a loss of $7 trillion in the U.S. stock market and $6 trillion in housing wealth. These losses led to declining demand, with GDP and employment shrinking at rates among the most rapid since the Second World War; 4.4 million jobs were lost by 2009.
While the crisis originated in the US, it hit Europe harder. The US addressed the crisis with expansive monetary and fiscal policies. Congress allocated $700 billion to purchase troubled assets from banks as part of a bank rescue plan.
EU Trade Agreements: TTIP and TiSA
TTIP (Transatlantic Trade and Investment Partnership)
TTIP is an agreement between the EU and the US aimed at facilitating trade and creating the largest free trade zone. Free trade allows for specialization, lowers production costs, and benefits participating countries. However, despite the theoretical advantages, some individuals and sectors within these markets may experience negative consequences from deregulation.
Furthermore, economic theories often treat products as homogeneous commodities, which is not the case. Public concerns have been raised regarding quality standards within the TTIP framework.
TiSA (Trade in Services Agreement)
TiSA is a treaty designed to facilitate the trade of services among a group of WTO countries. Services play an increasingly important role in global economies. Similar to previous GATT/WTO rounds focused on products, service tariffs are now subject to negotiation. Concerns arise when these services relate to public goods, such as health or education.