Introduction
As from 2009, the Eurozone has been undergoing a monetary crisis, which calls for major austerity measures. With Greece, Ireland, Portugal, Spain, and Italy being among the first victims of the crisis, other countries in the Eurozone are feeling threatened that economies may face the same challenges as the mentioned countries even as their rate of borrowing increases. The Eurozone financial crisis is not only a European threat, but also a global problem that demands for an international concern. The current situation is quite a contrast to the optimistic spirit that was evident during the commencement of the late 1990s.
Whilst the Eurozone is applying every possible measure to eliminate the problem, the ultimate solution is still to be determined. Indeed, this turmoil is not simply a financial crisis as it has political links that will compel political leaders to assume excruciating measures that will call for grave distributional impacts. If certain leaders continue hesitating on taking such measures, then the solution will remain obscure. Meanwhile, the impact of Eurozone crisis on the internal as well as external unity of the European Union will continue exacerbating. This paper explores the impacts of the crisis on the EU and the international community.
Eurozone Crisis Overview
The financial crisis facing the European countries commenced in 2009 with the first victim being Greece. Leaders in Greece announced that the preceding regimes had been giving erroneous financial reports, which led to sudden deficit levels that discouraged investors, thus making the bond spreads to mount to irrepressible levels. Several other countries in the Eurozone were undergoing similar financial crisis.
Later on in 2010, other states in the Eurozone as well as the International Monetary Fund (IMF) gave Greece some loan to help in settling its debts, as it was at the brink of defaulting. Meanwhile, there was a rising concern about the bond spreads in Portugal and Ireland; however, when reality dawned, the two countries were forced to turn to IMF for loans to settle their debts.
The European leaders are concerned with the demand to introduce a number of policies to mitigate the crisis as well as avert the corruption in certain countries and in particular Spain and Italy. Unfortunately, the policies failed to avert uncertainties. The monetary crisis has further created a political stalemate. Those who oppose the austerity measures have received it with criticism and dissents.
Countries with strong economies can assist those being tormented by the financial crisis, but they have incessantly criticised those weak countries for declining to apply good policy ideas. Furthermore, there has been a rising unease in the market, due to the conflicts among the main decision makers in the EU, on the most pertinent way to handle the stalemate. Moreover, the situation has been worsened by the thought that policymakers are sluggish in the decision making process.
Conducting business has been difficult in Europe even as leaders struggle to come up with ways to resolve the stalemate that has been exacerbated by the governments’ austerity policies and mistrust from consumers. These challenges are likely to derail the Eurozone from coming out of the financial crisis. Despite these difficulties, reports show that investors are still willing to invest in the region. Possibly, they have adjusted to the reality that Europe will always have financial issues.
Impact of the Eurozone crisis on the internal EU unity
With respect to the cause of the crisis, experts argue that it developed from a number of similar obstacles that the Eurozone countries underwent accompanied with some distinct challenges that some states suffered. The augmentation of the private as well as public sector in the previous ten years among the EU countries gradually triggered the ongoing financial crisis. When the countries adopted euro currencies and abandoned their national currencies, the effect was insidious. It led to unsustainable bond spreads. Many public and private companies took the advantage of the easily accessible and cheap loans. In the meantime, countries failed to until the capital inflows to earn revenue that help in settling the loans. Consequently, the amount of debts continued to increase.
While some countries had a high debt crisis in the public sector, for instance Greece, due to mismanagement of funds, others faced an unsustainable debt in the private sector. Nations such as Ireland and Spain suffered from the debt crisis in the private sector due to the mismanagement of finances in the banking as well as the real estate sector. These challenges were discovered in 2009 where there was an international financial crisis, hence difficulty for the public and private sector as well as individuals to get loans due to the withheld capital markets. Moreover, the government expenditure increased whilst the revenues reduced. Other states were compelled to settle debts of the private sectors that had no option, but to default them.
Conversely, capital inflows had a two-fold impact and they increased the growth rate whilst leading to inflation. Periphery countries that faced inflation found it difficult to compete with some Eurozone states, which applied measures that would ensure that prices remained relatively low whilst boosting exports. Consequently, periphery states were gradually but steadily starting to rely on other Eurozone countries that had steady economies for financial assistance in the form of loans.
The main challenge of the periphery states to overcome the debt crisis was the view that they were members in the Eurozone. They could control the financial deficits through currency depreciation, which would in turn help in increasing exports. Furthermore, the periphery states had a choice to increase the interest rates in an effort to dawdle the mounting economic growth. Nonetheless, given that they were Eurozone members they had to adhere to the union’s set rules, which limited individual states to regulate the interest rates.
Other than capital inflows, other issues affected individual countries, which triggered the financial crisis. For instance, Germany was governed by corrupt officials, thus causing misappropriation of funds in the public sector, numerous cases of tax evasion, and soaring government expenses and in particular government employees. In the case of Ireland, financial institutions were immense.
In an attempt to support the banking system, the government guaranteed an amount that in turn led to a budget deficit and eventually raising the public debt levels. On the other hand, Portugal had sluggish economy in the region prior to the international financial stalemate. Italy had been struggling with debt crisis for a long period and when the Eurozone crisis struck, it exacerbated the situation in the country and exposed it to tough credit terms.
One of the main problems that Eurozone is currently fighting is the elevated status of public borrowings and the budget deficits among its members. Despite the financial assistance from the IMF and some European states to assist them in settling their debts, the crisis remains incessant. Eurozone members are being compelled to reorganise their debt, which is anticipated to have deleterious effects on the private sector. One of greatest worries for traders in the Eurozone is the debt crisis in Italy, which is larger than the sum of Spain, Portugal, Ireland, as well as Spain. Consequently, traders who are still daring to invest in Italy and Spain have demanded higher interests for the bonds offered. The high interest levels have instead bolstered the debt levels, thus creating uncertainties whether these debts are sustainable.
The banking systems of countries in the Eurozone are weak especially those in the periphery. Observers have noted that the systems are unable to sustain the sovereign bonds in case any of the Eurozone states fails to settle its debts. Moreover, the stalemate has caused capital flights in financial institutions that have hampered banks to seek funds from private capital markets. The sluggish economic growth has also discouraged the efforts to eliminate debts. There is a high rate of unemployment in the Eurozone with the highest being reported in Spain.
Furthermore, the incessant trade deficits have discouraged the victimised countries to adopt export strategies that can facilitate in controlling the debt crisis. In an attempt to reduce the deficit, the periphery states have adopted structural reforms, for instance through loosening the stiff labour markets to boost exports as well as competition with other Eurozone states. Unfortunately, the impact of these strategies is only expected to be seen in the long-term. Notably, the crisis has helped analysts to discover the faults in the European organisation. For instance, the members of Eurozone apply similar monetary strategies despite their disparate budgets. If the countries are having similar fiscal plans, it may be easier to handle such financial crisis whenever they crop up.
Effect of the Eurozone Crisis External Unity of the EU
The Eurozone crisis has gained an international debate over the past few years. The re-emergence of international financial havoc has been linked to the Eurozone crisis as is evident the various international meetings organised by the advanced economies. The following areas will highlight the impact of the Eurozone crisis to the advanced economies, developing countries, as well as the European countries.
Advanced Economies
The financial turmoil in the Eurozone has affected other advanced economies such as the United States and Japan. Despite the continued purchase of the US currency as well as bonds by investors, the relationship between the US and the EU has dwindled. Prior to the rise of the Eurozone crisis, the US was at onset of convalescing from the initial global monetary crisis. The US economy had been sluggish in the first half of 2009, but the recuperation was evident in the last half such that by the end of the year, the economy had dwindled by only 3.5 %.
Meanwhile, investors maintained their trust in the US economy despite the financial lapse in the Eurozone. When compared to the euro, the US dollar grew to become more valuable than the latter following the evolution of the financial turmoil in Europe. Unfortunately, the increased value of the US dollar has had deleterious effects on its economy. This assertion holds, as when the dollar is stronger than the euro, the items traded in terms of dollars are less valuable as compared to those sold in Euros in the international platform. Other than the effect of the stronger dollar on exports, there has been a reduction in the demand of goods by the Eurozone states due to the financial crisis.
It is surprising how investors have maintained their trust in the US economy and its capability to clear its debts considering its experience during the global financial crisis. The Eurozone crisis came up when the US was just healing from the 2008 monetary crisis. Moreover, there was a split in the government following the Republican Party’s assumption of the House of Representatives.
The split in the government was evident when the leaders had extensive debate on whether the country should increase the debt ceiling that would in turn help in increasing the bonds that it offers and eventually settle existing debts. After the conflicting side came to an agreement, the debt ceiling as elevated. Subsequently, the interest of investors on the US bonds increased and as a result, the bond yields reduced.
Another overt impact of the Eurozone on the relationship between Europe and the US has been the ever-depreciating interest to venture into business with the US. Prior to the crisis, the EU firms had invested about $131.9 billion. However, this aspect has reduced in the subsequent years. For instance, in 2010, the amount invested by the EU firms in the US was about $105.07 billion. However, the declining relationship between the EU and the US due to the Eurozone crisis did not have a grave impact on its economy. The US economy rose by 1.7% in 2011 contrary to the sluggish economic growth they underwent during their recovery from the global financial crisis.
The US government has encouraged the EU to fund its bailout machinery in an attempt to encourage traders that their investment is safe in the Eurozone. The European Financial Stability Facility (EFSF) was formed as bailout machinery whenever European states had monetary problems.
This bailout machinery is financed solely by the European states unlike other organisations such as the IMF, which receives funds from its member states, for instance the US, which contributes about 17% to the organisation. The Obama administration has noted that the European states should make an effort to finance the EFSF before the US decides whether it can raise its monetary support to the IMF. Furthermore, the U.S. has contested the efforts to raising the amount, which the IMF offers to help the Eurozone states that are about to default their debts.
Moreover, some investors from the US have started withdrawing their money-market funds from the European nations with the fear that the financial crisis in the region is too risky for investment. For instance, if Spain fails to settle its debts, then the investment in the form of bonds would become valueless, which would in turn have negative effect on the money-market funds. The withdrawal led to a scarcity of the US dollar in the financial institutions in Europe.
The banks used the US dollar to conduct their international transactions, as it is the most accepted. Furthermore, banks were unable to settle debts that they taken in the form of the US currency. Subsequently, if the banks failed to settle the debts, then it would have a deleterious impact on the creditors as they had to get other sources to finance their debts. In essence, the withdrawal of money-market funds would further complicate the process of getting loans, as it would augment costs. The impact would spread to become a global problem.
Though the US has invested a lot of energy and strategies to recuperate from the international monetary crisis, the Eurozone crisis has been an obstinate obstacle. The rising value of the US dollar as well as declining transaction between the US and the EU is a matter that must be debated by political, private, and public sector leaders. If the situation in the EU worsens, it reduces the revenue earned by the multinational firms trading in Europe.
Indeed the latter would affect the growth rate of the US economy. Moreover, if the banks, due to the crisis, default on the debts borrowed from financial institutions in the US, it would raise the cost of getting loans in the country and eventually dwindle away the rate of growth. Fortunately, the nature of trading the most victim countries is not very grave; hence, the impact can be as insidious as would be predicted. Furthermore, the fear of debts being defaulted is not as serious as before as the US reintroduced the money-market funds that have consequently helped the states to recapitalise.
Japan has also played a core role in developing the strategies to control the ongoing Eurozone crisis. It has bought the EFSF bonds though it also has many debts that it must settle. The value of the Japanese Yen has surpassed that of the Euro soon after the rise of the Eurozone crisis. Unlike the US, investors seem to have little confidence in the Japan’s economy going by increasing need for debt default insurance.
Nonetheless, some investors have continued to invest with the country and ignoring the financial challenges. The natural catastrophes such as the recent tsunami have played a key role in derailing the growth rate of the economy. The continued investment in Japan despite the financial turmoil could be that it has liquid currency and the much of the debt that is accredited to the public, which is not likely default as they have concerned about the currency’s steadiness.
Indeed, the rise in the value of the Japanese Yen has negatively affected the revenue earned from exports and consequently derailed the economy. This aspect has raised concern among traders who have requested the Bank of Japan (BOJ) to initiate strategies that would help reducing the currency’s value. Despite these challenges, Japan has remained loyal in helping the EU throughout the monetary crisis era.
Through purchasing the EFSF, Japan has been in a position to fund the bailout machinery with the necessary finance to avert the monetary turmoil. The continued support for the Eurozone could be driven by the view that Japan has high foreign reserves as compared to the US, and hence it is able to purchase the European bonds. With reference to this fact, the Eurozone leaders have encouraged Japan to purchase more bonds. Nonetheless, the funds received from the purchase of bonds were not adequate to resolve the region’s financial problems.
In essence, during the period of the crisis, most investors have opted to buy Japanese bonds. Meanwhile, the increasing value of the Japanese Yen has made its products less competitive in the global market. It is also surprising that Japanese has continued to prepare high budgets despite its debts. The latter has made investors raise concerns if Japan will sustain its economy in the near future.
Emerging Economies
Contrary to the advanced economies, the Eurozone initially had minimal impact on emerging states such as China, Brazil, and India until late in 2011. For instance, in the case of China, the financial difficulties in Europe have reduced its exports income and forced it to reanalyse how to manage its economy. Prior to 2011, China had witnessed a high economic growth rate. As any economist would predict, this was likely to be followed by increased inflation. In a bid to avert this scenario, the country increased the interest as well as the money held by financial institutions. The strategy helped in lowering the economy, but this move was short-term. The impact of the Eurozone spread to China.
About 20% of China’s exports are shipped to Europe and with the ongoing crisis, it is clear that the profits from exports will decline. The debt crisis forces the Eurozone to limit the amount the products they are importing. Records indicate that China’s economic growth reduced in 2011 and 2012 mainly due to the reduction of items shipped to the Eurozone. The deteriorating economy forced China to alter its previous stand to allow companies and the populace to get loans easily in an effort to increase economic growth once again. Moreover, discovering the impact that foreign markets can influence its economy, China has laid down plans to establish a domestic-oriented economy.
The latter, according to the government, can only be achieved through raising minimum wage as well as increase social security services. Another option would involve raising the currency value to improve the purchase capability among the citizenry, and thus fortify the domestic market for its goods. Nonetheless, the Chinese government notes that bolstering the currency will make exports more expensive, and thus tamper with the gains made from the domestic market. Moreover, a domestic-oriented economy would affect other emerging economies negatively as they hugely benefit from raw materials exported to China.
China has been reluctant in purchasing bonds from the troubled Eurozone. It has encouraged the EU to try to handle its situation first before including it in the resolution plan. Furthermore, the reluctance has been exacerbated by the recurrent conflict between Europe and China. It has created a good platform for China to avenge. Over the years, Europe has put high tariffs on Chinese products, which has been heavily opposed by the Chinese government as such a move tampers with shares in the global and export revenue. Hence, China has noted that it would be willing to assist Europe if the latter is willing to remove the bottlenecks it has created in relation to the sale of Chinese products in its market.
However, Europe has indicated no signs to oblige to the conditions set by China, as the EU assumes that if it removes the restrictions, then Chinese products would outdo those produced by the European businesspersons. China finds it more comfortable to assist the EU through the IMF. The argument of China is that by assisting states across the world resolve their problems through the IMF, it increases its political authority in the monetary body. Despite the means through which China chooses to help the Eurozone handle the crisis, its main aim is to gain from the assistance.
Developing Countries
Indeed, the Eurozone crisis has not been an internal issue as its effects have extended to the developing countries in the Middle East and Africa. Most African states are not usually affected by financial crises in Europe due to their restricted participation in the international manufacturing as well as monetary markets. However, African countries with stronger economies have felt the impact due to their elevated level of participation in the international economy. Nonetheless, the rise in oil prices caused inflation on prices of most commodities. In essence, the Eurozone is mainly affecting countries that depend on exports and in particular raw materials. A reduction of demand will reduce their income and tamper with the growth of their economies.
The Eurozone also adversely affects oil producers as with time, the demand for oil products will decline, which will in turn reduce the export revenue and eventually such economies will gradually drop. Moreover, most countries that export most of their oil products to Europe are likely to be affected seriously by the ongoing crisis. The more the Eurozone crisis persists, the more the impact on the economy, which might end up creating other problems such as unemployment.
Conclusion
The Eurozone is having not only internal, but also and external problem to the world. In an era where states operate as a unit, it is difficult for a country to escape the challenges of another suffering nation. Indeed, a number of mechanisms have been adopted in an attempt to provide the ultimate solution to the Eurozone crisis, which is slowly becoming an international issue. It is a threat to the relationship between the EU and other world economies.
Countries such as Japan and the US will have to rethink their economic structures. For the US to have a currency that is higher in value than the euro means that its products will become less competitive across the world market, whilst increasing the purchasing of the Americans. Hence, a country with a domestic-oriented economy will have to lower its supply of exports and at the same time strive to curtail inflation within the country.
The attempts to make China a domestic-oriented economy can only lead it to having inflation as well as causing suffering for other states and in particular African states that export raw material to the country. Most African nations are struggling with a high cost of commodities mainly due to the global trends that have led to an increase of oil prices thus making life more difficult for families in the Sub-Saharan Africa. The impact of the Eurozone to the internal unity of the EU is overt.
The EU is now facing an impasse on whether it should restructure the economic organisation of the Eurozone. The view that the region uses similar currency, viz. the euro, as well as monetary policies has barred states such as Greece who is at the epicentre of this crisis to develop domestic monetary policies such as reducing the interest rates to stabilise the economy.
Greece and other affected countries rely on the assistance of the IMF and the EFSF, although such helps have not been sufficient. Indeed, trade in the Eurozone market has dwindled with most countries focusing on how to settle their debts. However, this issue is not an eternal problem. With time, a solution will be discovered, but given that there is no effective solution, the crisis will continue to cause havoc both in the internal and external unity of EU and other countries.