In 2011, Europe faced one of the worst debt crises. Countries such as Greece and Portugal were heavily indebted and required the other countries in the bloc to bail them out. The only country that was not affected by the crises was Germany and this made her the “savior” of the region. France lost its AAA ranking and so did Italy, Spain, Cyprus, and Portugal (Preston).
This crises seemed to worsen everyday and at one time was threatening the economic and peace in the region as people in Greece started to riot. A report issued bi-annually by World Bank showed substantial cuts in growth rate for developed and developing countries.
The European debt crisis had analyst reevaluating their economic projection for the region (Preston). According to AgileNews, “in 2012, the global economy will record a growth of 2.5 percent and 3.1 percent in 2013” (AgileNews, 2011). This is 0.5 percent down from projections made in June 2011 for both years.
The debt crisis in Europe did not only affect the region, but many other economies were affected especially the U.S whose large multinational companies have vast interest in the European market. Andrew burns, the head of the World Bank’s economic team, stated that the debt crisis was just the beginning and the year was going to be a tough one.
The European debt crisis lasted throughout the year, and this worsened the situation in the region and other countries. Developing countries experienced fluctuation in economic growth due to increased inflation. The main problem was that each trend placed a negative effect on the other (EasyForex, 2011).
Understanding the European Debt Crisis
Investments rates decreased due to Europe’s debt crisis. The banks were lending less as emerging markets continued to rise. This led to a decrease in foreign exchange rates placed on developing countries. The investors, who willingly accepted to continue, investing, did so at reduced rates of about 45 percent, seen in the second half of last year.
The comparison was in relation to the projections in 2010. South Africa, Russia, India and Turkey felt the inflation as they resulted to borrowing loans to stabilize their economies. The European debt crisis created a dynamic market trend where increased interest rates increased inflation.
Forecasting reports revealed that developing countries gained 5.4 percent increase in 2012 as compared to 6.2 percent forecasted in June 2012. Developed nations had limited growth as only 1.4 percent, 1.3 percent down to the projections laid earlier. 17 nations currently use the euro as their currency. The decline in their economy was 0.3 percent from and expansion that had it at 1.8 percent.
The growth rate of the U.S. economy was at 2.2 percent, but expected to rise to 2.4 percent by the year 2012. The comparison with a report made in June 2011 saw the growth at 2.9 percent in 2012 and 2.7 in 2013. The European debt crisis did not only affect the developed countries, but also the developing countries. Most of the economies of developed countries experienced tough economic times as they were already facing a difficult time financially.
These countries had not yet recovered from the financial shocks in the 2008 global crisis, and they continued to take a hard hit by the downturn. The review by EasyForex (2011) urged the need for developing countries to boost their economies by lining up the budget for deficits in advance. It included a review on the health of their banks, and advising individuals to spend on social safety nets.
Developing countries faced higher debts and budget deficits in relation to the financials crisis experienced in 2008. This threatened economies as the conditions presented by the European debts crisis continued. This condition expected to take longer periods compared to the 2008. The U.S. economy suffered most due to the anticipated, economic slowdown.
The fight presented in Washington over downgrading by spending taxes to downgrade portrayed a weaker outlook. This projection was not only received from the World Bank, but also from private-based projections. Expected Improvement of the economy was to reveal past 2011 with a percentage of 1.7. Estimates of growth expected as from 27 January 2012 on the crisis of the debt and the pain inflicted on the major countries.
The effect of the European crisis prevailed through the number of export that the U.S. was able to send to Europe. The number fell by 6 percent in November 2011 with efforts of the commerce department aiding by pushing the trade deficit up by 10.4 percent equivalent to $48 billion (Wolf). The global effects experienced as trade financing lending cut back by the operational banks.
Trade financing did not aid in boosting the economy as exporters were not able to finance their costs through loans as they awaited returns. The exports of services and goods decreased by half in comparison to the previous year, but this was better than the volumes experienced in 2009 (AgileNews).The European debts crisis makes it difficult for the continued support on developing countries to continue.
The bank offers loans to the countries at low interest rated in support of health, education, and infrastructure projects. The warning continues to be stated, voices from the International Monetary Fund raising the alarm with relations to the economy situation as per December 2011.
If the European debt crisis is not resolved, protectionism and isolationism will hit the world’s economy entering into a Great Depression as experienced in 1930’s. Blame is on the European leaders as not decisive and affirmative action is in place to curb the debt crisis (Wolf).
Impact of the European debt crisis on multinationals
Multinational corporations are involved in producing products or services, which are later exported to other countries. The European debt crisis moved from affecting real economies to these companies. This was infecting to euro-oriented companies including energy companies, auto manufactures and consumer goods companies. Food and Drink companies as McDonalds and Coca-cola experienced low sales volumes.
Portugal, Greece, and other countries opted out of the euro meaning that their currency devalued increasing the costs on importing products (AgileNews, 2011). Siemens, a multinational dealing with electronics resulted to personal banks that made a direct purchase of the products invested. Leaders announced through proposals aims to address the crisis with highly voting for the bailout for Greece.
The European Financial Stability Fund (EFSF) proposed this move to facilitate handling low-cost loans borrowed by EU members, mainly Ireland and Portugal. Multinationals gain from the low- cost loans as they get financial assistance from banks (Wolf). This experience was relevant in multinationals such as Shell, Exxon Mobil and BP, the main oil companies and distributors.
The European Union is the largest trade market in the world. Representing 30 percent of GDP in the world resolving the debt crisis was significant. Dell, Hewlett Packard, and Microsoft are multinational technology companies in the United States who depended on the European Union with a percentage of 50% in revenues received from exports. The fallout was severe as it threatened the recovery process.
The biggest problem was on the banking system, which had to cushion the effects caused by bad debts. The Euro continued to suffer, as the debt remained unsolved. Car manufactures such as Toyota, Ford, and Volkswagen directly faced the effects of the crisis as a weak euro made exporting less competitive (EasyForex).
The debt was risky for emerging European unions. Ukraine, Balkans, and Hungary depended on trade between the European Union and the west. Portugal, Greece, Spain, and Italy, which were struggling economies, depended on the growth of the Union. This slow down also affected the overall growth experienced in Germany and France (EasyForex).
Other countries in the globe experienced an indirect effect as a result of the debt crisis. Multinationals is Africa, South America and America such as Coca-cola faced losses acquired by weaker demand especially from China. The European Union experienced a fall out from main producers who had direct linkages with other countries in the world.
The effect fell on other countries as they lost the value in price of products not sold. Japan is one of the leading multinationals especially in the automobile industry. Faced with direct linkage to the European Union, Toyota was unable to make the high sales that it usually experiences. The Debt crisis was severe for Japan as continued debt encouraged a safer haven to the Yen.
India maintained a comfortable circumstance as it experienced strong growth in their economy. The prospects projected for 2012 were positive for 2012 the year carried business independently from countries in the world mainly Europe. Ratification of the changes started with; Ireland, France, Luxembourg, Italy, and Spain. Australia, Slovenia, Germany, and Finland expected to follow into the ratification (EasyForex).
The people living in the region were affected by the moves that these multinationals took. Prices of products by this companies were increasing as they tried to cover the rise in inflation and meet the targeted profit margins. People were forced to borrow heavily from banks and as many people lost their jobs they started to default on their loans and mortgages worsening the situation.
Analysis of past financial crisis shows that for a financial crisis to be solved, the affected nation and the region should change their policies. The proposals that have and are being drafted by countries in the region show that the region is dedicated to maintaining its stature as an economic hub and a place where multinationals can do business. The European debt crisis worsened the problems of inflation, which had been affecting the region.
Multinationals are major financial players in any economy and when they are affected the economy is bound to be affected. When a country is heavily indebted, citizens are left to suffer under this multinationals. They set their prices to cover for the inflation and to meet set profit margins. This shows that they need to be regulated by authorities so that they do not exploit the citizens.
AgileNews. “European multinational corporations begin to evaluate the risk of disintegration of the euro area”. 2011.
EasyForex. “How the eurozone can hurt the rest of the world”. 2011.
Peston, Robert. “France loses AAA rating as euro governments downgraded.” BBC BUSINESS NEWS. 2012.
Wolf, Richard. “Five ways the European debt crisis could affect the U.S”. 2011.