Economic And Financial Crisis In Europe
Economic And Financial Crisis In Europe
Problem Overview
Greece was the first to undergo the challenge of the debt crisis during the late 2009. This problem has recently spread to become a political and economic crisis in the whole of European Union (EU) and the Eurozone. The Eurozone is specifically faced with four significant and related economic challenges. These problems are: A.) continuous imbalances of trade in the whole of Eurozone. B.) high unemployment rates and economic recessions in most countries of the Eurozone. C.) the weaknesses of banking systems across Europe. D.) high public deficits and debt levels in some countries in this continent. The Eurozone is further faced with political crisis that impact on the financial and economic aspects. The key policymakers are in constant disagreements on the right strategies for responding to the looming challenges. The policy making process of EU is further complex, and it impacts on markets anxiety. Many governments of different countries in European nations have fallen as a result of the direct or indirect impact of the financial and economic crisis.
Due to the looming financial and economic crisis in Europe, the United States is also affected. Analysts indicate that the current Eurozone crisis is a huge threat to the economic recovery of the United States. For example, the Treasury officials of the United States indicate that the exposure of this country to some of the Eurozone, countries could have a little market impact to the US. However, US exposure to most countries of Europe will lead to a significant effect. . The Euro has recently fallen against the dollar. The weakening of the U.S dollar impact on the trade deficit of the US to widen with the European Union.
Financial crisis in Europe
In 2012, various Eurozone countries have experienced intensive market pressure especially during the summer season. The main concern is that the financial and economic crisis has been spreading from Portugal, Ireland, and Greece to the major economies, such as, Spain, England, and Italy. In August and September, some developments were made with the aim of calming down them markets. One of these developments was the European Central Bank (ECB) announcement in establishing the bond buying program. This was with the goal of lowering down the interest rates of the government bonds. German Constitutional Court in September 13, past a ruling in advocating for a permanent rescue fund from EU based on specified condition. There was also the proposal for a single supervisor on banking according to the European Commission. Despite the developments, questions still remain unanswered. The purchasing of bonds by ECB is based on conditions directed towards governments programs in need of rescue funds from the European Union. The economic reforms should only be attached to the given assistance. Countries such as Italy and Spain have never requested for funds from these programs. In Greece, there is continuing pressure as seen in the way the prime minister of this country is appealing to French and German leaders for more time for economic reforms and budget cut implementation.
Economists suggest that Greece should be provided with more aid in order to avoid debt defaultment. The other European governments are further under tension based on the debates about the banking Unions of Europe. Some of the challenges that are facing the Eurozone are; lack of high paying employment, stagnant economic growth, and imbalances in the internal trade. These are the current challenges, which pose a major question on the future of Eurozone. Policymakers and economists are questioning on the position of Greece to continue being a member of the currency union. They question other countries, which will follow Greece after her exist from the union. Italy is under concern to be the next victim of financial infection in Europe. This has made investors nervous and is selling their Italian bonds and stocks. The country’s officials have aired out their concern about the $125 billion that was pleaded to Spanish banks by Europe that it was unable to put the crisis under control. The stock index performance of Italy has been very poor in the recent past months. Others are, however, optimistic that the European institutions and leaders will do all things possible to sustain the intact nature of Eurozone. This way EU will emerge from the current changes in a more integrated and stronger way.
Other European countries following Greece include Ireland, Portugal, Belgium and Spain. Portugal has also suffered the same challenges as those like those of Greece. Its GDP fell by more than 55 in 2012, which translates to losses of 50% and 118% as public burden that will income on the fiscal GDP of 2013. Portugal has a debt of 105 that is far much worse than Greece. Germany and Ireland are also fought with their pitfalls. Such challenges have made Germany consider, the reintroduction of D-Mark and leaving Eurozone. Germany and France are the two largest economies in Europe. They have been in the forefront in tackling with the economic and financial crisis of the region the German Chancellor Angela Metlkel, being backed by the French, as been advocating for the response to predicament, such as tax increase, the cut on spending, financial exchange and other structural reforms for financial support.
impact on the financial situation in the United States
The economic and financial crisis in Europe poses a high threat to the United States economy in a different mode and channels. One likely channel is via the financial system. This mainly results to the US exposure of the Eurozone financial institutions. The MF Global Inc., one of the financial intuitions of America in October 2011 filed for bankruptcy due to its Eurozone exposure. This is mainly as a result of the idea that the Eurozone’s development does impact on the stock markets of United States (CRS Report, 2011).
The US bank exposure according to data from the Bank of International Settlements(BIS), shows that the direct or indirect exposure of US banks to Italy, Ireland, Spain, Portugal and Greece by March 2012, was at $770 billion. This is the same as 7.5% of potential and direct exposure abroad (BIS, 2013). This data does not reflect on the collateral or hedges that the American banks have undertaken in lowering exposures they face. Banks such as Goldman Sach and JP Morgan Chase have an exposure of more than $80 in Portugal, Spain, Italy, Greece, and Ireland. The banks, however, use credit swap in offsetting to of loses. The Investment Company Institute analysis indicate that, the national association of the American investment firms, sees that the money market fund limits their exposure to Europe countries by a half and above. This is in comparison to the 31.1% in May and the June 2012 data of 12.2% “(Gallagher, & Plantier, 2012).
The Eurozone crisis can also negatively impact on US through investments and trades. The European Union is the largest trading partner of America. Approximately 20 percent of its merchandise exports and another 30% of its services are exported to the EU (CRS, 2012). The challenges in Europe could impact on the aggregated demand and exchange rates changes in Europe the continuing crises have made U.S lose confidence in the value of the euro a, which in the recent month has fallen against the dollar. In the bringing of July 2012, the euro had fallen by 7% by the end of the same month (CEB, 2012). The weakening of the Euro against the dollar will lead to a decrease of products and service to the Eurozone, and there will be an increase of imports from the Eurozone into the US.
The uncertainty towards the Europe further creates volatility in the “flight to safety” and stick markets of the US. This means that the treasury yields of the United States will fall. The Eurozone break up in the long term will impact on the economic cooperation issues between US and the European Union.
Reference
CRS Report (2010) World Bank, data World Development Indicators.
Cooper W (2011) EU-U.S. Economic Ties: Framework, Scope, and Magnitude,
Bergsten F and Kirkegaard, J (2012) the Coming Resolution of the European Crisis: An Update, Petersen Institute for International Economics.
MF Global, Inc. (2012) the MF Global Bankruptcy and Missing Customer Funds, by Rena S. Miller.
Gallagher E & Plantier, C (2012) U.S. Prime Money Market Funds Holdings of Eurozone Issuers. Retrieved from http://www.ici.org/viewpoints/view_12_mmfs_europe_data_june.
On October 27, 2012
ECB (2012) it fell from 1.3061 dollars per euro on January 3, 2012 to 1.2089 dollars per euro on July 24, 2012.
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