International Issue

Topics: Inflation, European Union, Monetary policy Pages: 17 (6287 words) Published: April 13, 2013
International Economic Issues
EXEE 2108

Dr. Mohamed Aslam bin Gulam Hassan

Prepared by:

(a)“Euro zone crisis is dragging the world economy into wide depression in 2013”. Do you agree with the statement? Explain. I am agreeing with the statement. Euro zone crisis is an ongoing financial crisis that has made it difficult for some countries in the euro area to repay or finance their government debt without the assistance of third parties. The adverse economic consequences of the euro include the sovereign debt crisis in several European countries, such as France, Germany, Greece, Ireland, Italy and so on. It lead to the fragile condition of major European banks, high levels of unemployment across the eurozone, and the large trade deficits that now plague eurozone countries. In the years of 2007–2008, the global economy was hit by one of the worst financial crisis, unprecedented in history. It was caused by the sub-prime crisis in the US. Even before the world could recover completely, the Euro zone crisis has hit the global economy again. The crisis is already having an impact on the world order. As of now, nobody really knows how long the crisis will continue, and what it will damage to global economies. Causes of the 2010 crisis in the euro zone

The downfall of the euro exchange rate against the dollar by more than 15 percent compared with the beginning of the year – amidst the ongoing global financial and economic crisis -- provoked a series of unjustified panicky prognoses about the approaching collapse of the single European currency and a new spiral of the world crisis. Indeed, one of the euro zone members – Greece – was on the brink of default in the spring on 2010, and it was only outside assistance that bailed it out. Meanwhile, the euro continued its downfall, dipping below the 1.20 dollar benchmark in early summer.It should be borne in mind however, that the euro rate actually returned to the 2003 level after several years of “an expensive euro.” In 1999, the euro traded at 1.17 dollars whereas in October, it posted the historical low of 0.82 versus the U.S. currency. By July 2010, the recovering euro climbed past the 1.25-dollar benchmark which largely fits into the long-term trend of the single European currency. How the Euro Debt Crisis impact on the World?

Euro crisis is not just a problem of the Euro Zone. The Eurozone is a massive market for businesses from the United States, China, India, Japan, Russia and the other major world economic powers. For USA and Euro Zone, they are big lenders to each other and borrowers from each other. As USA holds Euro bonds, the Euro crisis would hit the USA financial sector as the USA investors lose their assets values. And, it is worthwhile noting that historically USA is a “debt-financing” country as it continued with massive trade deficits, but managed to import what it wants by borrowing from abroad. Therefore, both USA and Euro Zone, which have the biggest consumers in the world and must reduce their expenditure, would be faced with a slump in aggregate demand simultaneously. These two countries are also the major trading partners of each other as they import from each other and export to each other. If the USA has to buy less from Euro Zone and, vice versa, they both have to face a contraction in international trade too. This is another channel of the spread of crisis impact contributing to the decline in aggregate demand. The eventual outcome is a fall in incomes and a loss of employment, once again. In addition, a series of sovereign credit downgrades has hit many developed countries: the US lost its triple-A credit rating for the first time in its history, Italy and Spain experienced several downgrades, and France's triple-A rating is under threat. What's more, unemployment is on the rise throughout advanced economies, with...

References: 2. ^ a b Haidar, Jamal Ibrahim, 2012. "Sovereign Credit Risk in the Eurozone," World Economics, World Economics, vol. 13(1), pages 123-136, March
4. Euro zone crisis: Causes and consequences for the Euro-Atlantic region / Report for the Euro-Atlantic Security Initiative Commission, July 2010 – M., IMEMO RAN, 2010. – 31 P.
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