CriticART the Economic Crisis C T I Borcea

7/27/2019 CriticART the Economic Crisis C T I Borcea

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criticART - Young Artists in Emergency

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Chapter 1: World economic crisis of 2007-2008

1. Outbreak2. Causes3. Effects

1. OutbreakThe current economic and financial crisis appears to be without precedent in the last half

century. The economic recession spreads in the US, Europe and Japan and the impact is felt to

be much more painful than the economic loss from 1981-1982. A massive decrease in

confidence in both the business sector and the consumers, both responding to restrictingexpenditure, is in full progress. In 2008, for the first time after the 1930s, the world economy

experiences a systemic financial crisis: on September 18, the international financial system is on

the verge of collapse and the credit market ceases work in the next four weeks. But the

beginning of this economic crisis goes back to 2007, when in August, 9, the French bank BNP

Paribas suspended its transactions for three of its hedge funds which had contributions in some

American so called subprimes.

Even if the effects of the latest crisis are still not known, bankruptcy of large financial

institutions and massive government interventions in the world are signs of a strong economic

depression, comparable to the great depression of 1929-1933.

2. CausesThe cause of the financial crisis was the abundance of liquidity created by the major

central banks of the world and the desire of countries exporting oil and gas to limit currency

appreciation. There was also an overflow of savings, generated by the growing integration into

the global economy of countries with high rates of accumulation and redistribution of wealth and

income to exporters of goods, raw materials such as oil and natural gas. Abundant liquidity andoversaturation of savings have created available resources for investments, including the

sophisticated financial instruments, not easily understood by some investors.

The consequences of the existence of abundant liquidity were very low interest rates and

reduced volatility. Together, these consequences led to the increasing appetite for assets with big

gains. In addition, the low volatility of the market created a tendency to underestimate risk and a

real lack of vigilance of the investors.


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3. EffectsRisk margins were also very low and non-discriminatory. Together, low interest rates, the

appetite for big gains, with low risk of vigilance and small margins masked the price signals tofinancial markets and led to insufficient understanding of the risks involved. They operated as an

aggravating factor, to which a range of causes can be added: frantic cracks in the securitization

business model of rating agencies, and increased international competition for deregulations.

Therefore once the crisis was triggered by failures of repayments on housing loans, the financial

market became transparent.

In the US and in some European States, Governments and central banks responded by

improving liquidity; the granting of Government guarantees for loans; recapitalization of

financial institutions; ensuring the latest issues of the insured banks; preventing the collapse of

large interconnected enterprises; purchasing bank shares; coordinating interest rates cuts.

Although such measures were implemented, after 17 months of restlessness, the

triggering market remained transparent, which magnified the financial crisis and resulted in its

passing in the real sector of the economy, firstly in the USA, then in other countries.

Chapter 2: The economic crisis in EU

1. General data2. Povertyindicators in UE

1. General dataThe European Union is one of the most ambitious projects in the history of modern and

contemporary time, which has succeeded in establishing a climate of peace and stability in a

turbulent post-war context. The objective of the project is expressed in a very suggestive manner

by one of its artisans, Jean Monnet, who, in a speech held in Washington on April 30, 1952 ,said : We do not unify states , we are uniting people.

The economic crisis began as a national recession in Europe in December 2007, but

only met the IMF criteria for being a global recession, requiring a decline in annual per-capita

real World GDP (Purchasing Power Parity weighted), in the single calendar year 2009. The

IMF global recession definition does not evaluate quarterly data, despite the fact that quarterly

data are being utilized as recession definition criteria by all G20 members, representing 80% of

the World GDP. The exact start and end-point for the recession at the national level, however,

greatly varied from country to country, and some countries did not experience any recession at

all.


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Many countries in Europe had a second recession, starting on average about three years

after the first one. Yet,Germany, Switzerland and Swedendid not have a second recession, as

well as most countries outside Europe.

The crisis in Europe generally progressed from banking system crises to sovereign debt

crises, as many countries elected to bailout their banking systems using taxpayer money. Greece

was different in that it faced large public debts rather than problems within its banking system.

Several countries received bailout packages from the "troika" (European Commission, European

Central Bank, International Monetary Fund), which also implemented a series of emergency

measures.

Many European countries embarked on austerity programs, reducing their budget deficits

relative to GDP from 2010 to 2011. For example, according to the CIA World Factbook, Greece

improved its budget deficit from 10.4% GDP in 2010 to 9.6% in 2011. Iceland, Italy, Ireland,

Portugal, France, and Spain also improved their budget deficits from 2010 to 2011 relative to

GDP.

However, with the exception of Germany, each

of these countries had public-debt-to-GDP

ratios that increased from 2010 to 2011, as

indicated in the chart at right. Greece's public-

debt-to-GDP ratio increased from 143% in

2010 to 165% in 2011.This indicates thatdespite improving budget deficits, GDP growth

was not sufficient to support a decline in the

debt-to-GDP ratio for these countries during

this period. Eurostat reported that the debt to

GDP ratio for the 17 Euro area countries

together was 70.1% in 2008, 79.9% in 2009,

85.3% in 2010, and 87.2% in 2011. en.wikipedia.org

According to the CIA World Factbook, from 2010 to 2011, the unemployment rates in

Spain, Greece, Italy, Ireland, Portugal, and the UK increased. France had no significant changes,

while in Germany and Iceland the unemployment rate declined. Eurostat reported that Eurozone

unemployment reached record levels in September 2012 at 11.6%, up from 10.3% the prior year.

Unemployment varied significantly by country.


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Economist Martin Wolf analysed

the relationship between

cumulative GDP growth from2008-2012 and total reduction in

budget deficits due to austerity

policies (see chart at right) in

several European countries

during April 2012. He concluded

that: "In all, there is no evidence

here that large fiscal contractions

[budget deficit reductions] bring

benefits to confidence and

growth that offset the direct

effects of the contractions. They

bring exactly what one would

expect:

http://gulzar05.blogspot.ro

small contractions bring recessions and big contractions bring depressions." Changes in budget

balances (deficits or surpluses) explained approximately 53% of the change in GDP, according

to the equation derived from the IMF data used in his analysis.

Economist Paul Krugman analysed the relationship between GDP and reduction in

budget deficits for several European countries in April 2012 and concluded that austerity was

slowing growth, similar to Martin Wolf. He also wrote: "... this also implies that 1 euro of

austerity yields only about 0.4 euros of reduced deficit, even in the short run. No wonder, then,

that the whole austerity enterprise is spiraling into disaster.

European policy responseswere firstly limitedto a small number of countries Spain

and Italy in 2008 and the financial rescue plan established one year later met reluctancy from

some European partners like Germany.

2. Poverty indicators in UEThe effects of the financial crisis at the level of the population are also reflected in the

poverty statistics, whose rate rose in the whole European Union in 2011 to 119. 6million people,

this representing 24.2% of the total population, an increase from the 23.6% in 2010 and 2008.

The main places where it rose are: Bulgaria (41%), Romania (40.3%) and Latvia (40.1%),

respectively Lithuania (33.4%). At the other extreme is the Czech Republic (15.3%), The

Netherlands (15.7%), Sweden (16.1%), Luxembourg (16.9%) and Austria (16.8%). These being


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said, there is a decrease of the poverty and the social exclusion of 3.7 pp in Italy and 3.3 pp in

Greece, Romania (-1.1pp) and Portugal (0.9 pp)

The most vulnerable group of poverty is represented by the children, with 27 pp, the most

exposed being the ones from Bulgaria (51. 8%), Romania (49.1%), Latvia (43.6%),Hungary

(39.6 %), at the other pole being Norway (13%) , Sweden (15.9%) and Finland (16.1%)

The rate of the poverty in the active population is also high, at the level of EU being of

24.3pp , the most exposed being the ones in Bulgaria (45.2 % ) , Latvia (43.6 %) , Hungary

(39.6%), and the lowest rate of the poverty amongst active population is Switzerland (13.9 pp) ,

Island (14.3 pp ) , Czech Republic (15.1pp) , Sweden (15.4 pp ) and Norway (15.9 pp)

The old people, who are identified at the first sight as being the most exposed to poverty,

actually represent the least exposed group, taking into consideration that 20.5% are confronted

with it. In states like Bulgaria, Cyprus and Croatia, the old people are more exposed than the rest

of the population. The ones from Romania represent 35.3% of the 40.3% of the total population.

On the other pole, with the least poverty rate is Iceland (4.5 pp), Luxembourg (4.7 pp ) and

Netherlands ( 6.9 pp).

From the total population exposed to poverty in EU in 2011, 16.9 pp are still in the zone

of severe deprivation, respectively of social exclusion and after they received social

compensation, representing 0.9 pp more than in 2010, the percentage being higher than the one

in 2010 in Estonia (1.7 pp in 2011 compared to 2010), Bulgaria (1.6pp ) and Hungary (1.5pp).

Romania, Sweden and Slovakia (1.4pp). The highest percentage of the poor population exposed

to deprivation and after the social transfers (financial aid, the pension is not in this category) is

Bulgaria (22.3 pp ), followed by Romania (22.2%), Spain (21.8 %) and Greece (21.4 %), the

least rate being in Czech Republic (9.8pp ), the Netherlands (11.0%) , Austria (12.6 ) , Denmark

and Slovakia (13 pp)


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Chapter 3: The evolution of the economic crisis in Romania

1. Comparative analysis 2008-20122. Romania today

1. Comparative analysis 2008-2012

Evolution 2008 2012

Gross Domestic Product

(GDP)

Nominal GDP was calculated

at 195.71 billion lei, with an

annual increase rate of 8.2%

Nominal GDP was calculated

at 109.4 billion lei ,with an

annual increase rate of 1.7%

Foreign trade

In the first 6 months of the

year, the total value of

foreign trades 17 billion

euros and the total value of

imports was 26 billioneuros

(9 billion trade deficit)

FOB (free on board) foreign

trades raised to 22. 3 billion

euros while the CIF (cost

insurance and freight)

importations amounted to

26.8 billion euros.

Account deficit was

calculated at 12. 4 billion

euros.

Account deficit was

calculated at 2.4 billion

euros.

Number of employees and

unemployment rate

4.827 million employees in

the economic sector and an

unemployment rate of 3.7%

4.301 million employees in

the economic sector and an

unemployment rate of

4.56%

Average gross

salary

1,738.5 lei (=1, 273 lei

net salary)

2,140 lei (=1,552 lei

net salary)

Rate of exchange 1 = 3.6557 lei and

$1= 2.3506 lei

1 = 4.4603 lei and

$1=3.5570 lei

Budgetary deficit 1.18 % (5.19 billion lei) from

gross domestic product

1.12 % (6.8 billion lei) from

gross domestic product

Of these indicators, the evolution of the most important will be analyzedhere.

a. Gross domestic product [GDC]2008: At the end of the first half of 2008, i.e. the end of July, the nominal GDC was RON

195.71 billion. In real terms, the GDP had grown by 9.3 % compared with the same quarter ofthe previous year. Annual growth in the first quarter was 8.2 %.


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Between 2009 and 2012, the largest declines were recorded in quarters II and III of the year

2009, when the GDP had declined by 8%, respectively 7.3%, compared to the previous quarters

of the year.The economy began recovering in the first quarter from 2011 (+ 1.7% compared to the first

quarter of the previous year) reaching a "peak" of 4.4% in the third quarter of the year.

2012: In the second quarter of 2012 the Romanian economy had an increase in GDP of

0.5% compared with the previous quarter and 1.7% compared to the same quarter of previous

year. At the end of the first quarter of the year the GDP was RON 109.4 billion.

b. Foreign trade2008: From the perspective of foreign trade, in the first six months of the year 2008 (first

and second quarters) the exports were 17 billion euros, while imports were 16 billion (trade

deficit of 9 billion euros in the first six months),while the current account deficit was 12.4 billion

euros.

The rate of imports fell more abruptly than the exports, Romania dropped to a minimum in

January 2011, when the trade deficit was 0.21 billion euros.

In 2008 a significant proportion of exports and imports was held by groups of products

with low value added:mineral fuels, lubricants and related materials,then machinery and

transport equipment and other manufactured products.

c. Number of employees and unemployment rate. Gross average salary2008: The total number of employees in the economy was 4.827 million and and the

economy had an unemployment rate of 3.7% (or 337 100 unemployed). Gross average wage at

the end of the second quarter was RON 1738.5 (1,273 average net salary).

On account of economic slowdown and entering recession, after June 2008 the number of

employees decreased steadily to a minimum of 4.095 million employees in January 2011,

subsequently starting to grow after the economic growth resumed.2012: The number of employees reached 4.301 million people in May, whilst the

unemployment rate was 409. 9 thousand people (or 4.56%). The average gross salary: 2140 USD

(1,552 average net salary).

2. Romania todayThe effects of the international financial crisis spread in the Romanian economy too.

However, in terms of direct impact, the banking system has been less affected because it wasn'texposed to toxic assets, as well as due to the prudential and administrative measures adopted by

the National Bank of Romania over the years.


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Indirectly, however, due to the international financial crisis and especially its obvious

consequence the recession in the developed countries the Romanian economy confronts with

a decrease in exports. The financial channel, with limited access to external financing, restrictsthe volume of crediting, and generates difficulties in private foreign debt service. The exchange

rate channel is reflected in the depreciation of the national currency. Regarding the confidence-

building measures, there has been a withdrawal of investors from Eastern Europe countries. This

aspect caused panic in the monetary and currency market and also there were some speculative

attackswhich made it necessary for the intervention of NBR. In the end, there were effects of

wealth and balance sheet, net asset deterioration of the population and, as a result of the high

proportion of loans in foreign currency and a fall in the price of movable and immovable assets.

The propagation of these effects makes the uncertainty related to the development of

economic variables to be extremely high. It contributes, in its turn, the crisis by emphasizing thenegative effects that it has on expectations and degree of prudence augmentation through to

consumers and merchants.

In Romania, the answer to the adverse effects of the crisis may not be similar to that of

some European countries or the USA. There are a few differences between the Romanian

economy and these economies, which do not allow copying simply packages of measures

developed there. In essence, it's about the fact that the Romanian economy has a large current

account deficit, indicating its dependence on external financing.

We have a choice between reducing the deficit or ordering market reduction in currentconditions of tension and distrust, with dramatic consequences for the exchange rate and

economic growth.

Chapter 4: The effects of the crisis in the North Eastern Region and

in the district of Bacau

1. Economic indicators2. The regional evolution of unemplyment and the employed labour force

1. Economic indicatorsUnder the economic-financial impact of crisis, the economic indicators didnt witness the

same evolution in 2009 and 2010, according to data provided by the Chamber of Commerce and

Industry.The biggest regression was felt in the dynamic sectors of the economy in Bacau, as well

as in construction and trade. In 2009, 132 commercial companies went bankrupt, and 5.200 out

of 27.000 trades have stopped their activity. According to the statistics provided by the Chamber


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of Commerce, in Bacau the turnover decreased to 28-30% in 2009,the start of 2010 bringing the

intensification of this trend. Unemployment was 8.93% in December 2009, double the amount

recorded in the same month of the year 2007.

The ability of economic sectors to absorb labour is declining,while the employment rate

is increasing in other areas. From data for 2008-2010 we can also observe a decrease in the

number of active people: the civil active population in 2008 was 257,500 people,the number of

employed people decreased to 225,000 in 2010 (a decrease of 12.5%), and this decrease was

more pronounced for female population than male.

2007 2008 2009

Total investments 98,7 109,1 99,4

Construction works 94,4 116,5 92,2

Equipment with and

without fitting

83,2 114,3 113,7

Means of transport 204 85,5 90

The comparative investment situation in Bacau

- investments index -One major consequence of the crisis was the decrease of the number of the employed

population and, directly, the increase of the percentage of the unemployed. Although 2012 seems

to have brought, in the department of Bacau, a slight change (a small plus for the rate of the

employed people), at the level of the North East Region (NORD EST), the rate of

unemployment continues to increase.

Average civil employed population

- thousands people 2005 2006 2007 2008 2009 2010 2011 2012

Total economy 1152,5 8245,1 8447,2 8476,0 8300,0 8370,0 8445,0 8540,0

NORD EST

(region)

1235,8 1228,2 1233,9 1234,5 1200,0 1197,6 1197,6 1198,7

Bacau 219,6 220,5 220,4 219,7 213,8 213,6 213,4 213,6

Botosani 149,2 148,5 151,3 151,0 145,7 145,4 145,3 145,3

Iasi 287,1 285,2 287,9 289,7 285,4 285,7 286,4 287,5

Neamt 197,2 196,7 193,2 193,1 188,7 187,9 187,9 187,9

Suceava 238,8 234,7 238,3 237,9 229,9 228,7 228,6 228,5

Vaslui 143,9 142,6 142,8 142,9 136,5 136,2 136,0 135,9


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2. The regional evolution of unemployment (NORD-EST Region)

Statistics show that the outbreak of the economic crisis led to major increase inunemployment rates.

Chapter 5: Buhusi in the context of the economic crisis

1. Young people facing crisis

2.Crime rates 2007-2012

3. Example of business affected by crisis

1. Young people facing crisisA group of 100 young people was questioned on different topics related to the economic

crisis.

0

1

2

3

4

5

6

7

8

9

2004 2005 2006 2007 2008 2009 2010 2011

Unemployment rate, %


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1. How much did the crisis affect you?

2. How did the crisis affect your family?

Much Enough Not too much Not at all

Both parents lost their jobs

One of the parents lost their job

(At least) one family member

left homein order to find a job

Our financial situation has gone

worse

My parents might not give me

any money

We limited our daily expenses

to the bare necessities

It didnt affect us at all

Others


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3. How did the crisis affect your personality?

4.How did the crisis affect people in general?

I am worrying about the future

There is much tension in the

family

There is violence around me

I had to give up on many things

that I used to like

I dont feel safe

I feel scared

I feel annoyed

I feel frustrated

I feel aggrieved

I am more optimistic

I realised that I had to rely on my

own forces

They became more indifferent

The became more passive

They became more aggressive

They became more suspicious

Now they care more about each

other

f. Others


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5. Before the crisis, I thought that after graduation I would

6.Now, after graduation I will

Find a good job

Study

Be unemployed

Marry and have my own family

Go abroad and study or work

Others

Find a good job

Study

Be unemployed

Marry and have my own family

Go abroad and study or work

Others


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7. Who is responsible for the crisis?

8. Do you think that if you emigrate abroad you will have to face racist behaviour?

Politicians

Democracy

The governors-

The European Union-

The USA

Ourselves

Others-

Yes

No

No answer


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9. Which of the following principles best describes your point of view?

2. Crime rates 2007-2012According to data provided by local Police Department, crime rates reached higher levels

in 2008 and in 2011; these peaks can be related to two major events; the outbreak of the

economic crisis in 2008 and the fact that 2011 follows a very difficult period in Romanian

history: 2010 was marked by many cuts: salary, retirement pensions, social allowances, which all

contributed to a decrease in the standard of living.

We did not start the crisis, but

we have to suffer its

consequences

We had to keep our heads

down and accept the decisions

of some international

organisations

I just want a job, this is all I

want, even if I will be paid much

less as compared to my studiesand my skills-

Others

0

100

200

300

400

500

600

Crime rates in

Buhusi

2007

2008

2009

2010

2011

2012


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3. Example of business affected by crisis

When you want to set up a business, the following must be taken into consideration: having the

raw material (well-made clothes, accessories), having sufficient financial resources to support

the business, keeping the business active and developing the activity in a fully populated area.

A negative example could be the following:

One day, an entrepreneur thought about setting up his own business: a clothes shop. At that

moment he had the raw material, a space in a central place and some people who could makepublicity for him.

For a few years, this affair was very profitable. In that area, there werent any other similar shops

and the merchandise was always on the customers taste. In these conditions the ownerdecided to

extend the commodity market. He bought a new place and he employed more workers.

After that, when the owner didnt have enough money to buy the merchandise, the sales started

to decrease considerably. He was forced to geta loan in order to support his business, but the

profit was lower and lower. Affected by the crisis and covered in debts, the owner decided to

close his business.

0

10

20

30

40

50

60

70

80

2007

2008

2009

2010

2011

2012


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2007 2008 2009 2010 2011 2012

Profit-I

market

Profit-I

market

Profit-II

market

Profit-I

market

Profit-II

market

Profit-I

marketJanuary 600 1200 750 400 150 200

February 800 1000 820 380 125 170

March 1050 1050 T860 430 100 60

April 1100 900 700 450 70 35

May 1250 880 650 370 50 -

June 1400 800 600 300 20 -

July 1700 760 540 280 - -

August 1650 720 510 260 - -

September 1760 670 300 290 - -October 1800 600 220 320 - -

November 1500 540 200 200 - -

December 1300 500 280 310 - -

Total: 15910 9620 6430 3990 515 465

*the prices are specified in RON(Romanian currency).

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CriticART the Economic Crisis C T I Borcea