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European Business Environment - Essay Example

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The Eurozone crisis struck in the year 2008 when the Eurozone was hit with a financial shock that eventually resulted in pushing the region into great financial distress. Countries such as Greece, Spain and Italy were majorly hit because they had very high levels of debt and they were unable to cope with the financial pressure to pay back their creditors the amount that they owed…
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European Business Environment
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Download file to see previous pages The Euro is the first currency that was introduced without the backing of any single country, and rather had a large number of stakeholders with no one really ready to take full responsibility. The single currency posed many challenges to some of the nations whose policies were not flexible enough and those with regulated markets. From the very first day, economists feared that any external adjustment to the Eurozone would transfer financial issues to the inflexible markets through the currency and exchange rates. Any shock would result in changes to the exchange rate which will create problems for nation who had inflexible markets such as a labor market. Another issue is the lack of supervision that was assigned to the banks of the nations in the Eurozone. The Irish bank, for example, gained its finances from the German and French banks but there no check on the limit of the borrowing from the Irish bank. Soon after the Irish bank found itself into trouble, it also affected the European Central Bank. The situation was sort of similar to the U.S. Federal Reserve where it serves as the central bank of several states. In this case, the European Central Bank served as the central bank of several nations and it had to keep the borrowing of its member nations into check at all points of time. However, there was no such policy present to keep this check and the banks were given permission to borrow, which eventually resulted in over-borrowing of funds of banks from external sources and thus the Eurozone economies faced such financial shocks. The European Central Bank is actually a very weak institution by design since its inception. It has a very limited authority to influence the financial position of the countries under Eurozone. Let alone the powers to influence, the ECB also as a limited set of supervisory roles that any of the central bank would have. The ECB does not have the authority to buy any of the Eurozone country debt which limits its power as a central bank and its role to correct the errors made by individual nations. Not just this, unlike the other central banks of nations throughout the world, the sole mandate of the ECB is inflation. By law, the European Central Bank had no authority to interfere to correct the unemployment issues and could only take measures that corrected the issues related to inflation. (Skaperdas, n.d.) Another issue is that the European Central Bank only has the power of implementing the monetary policies and it could not influence the fiscal policies, which were controlled by the individual nations. In the modern world, most of the financial issues are addressed though fiscal policies which trigger or control the economic growth and inflation levels. Therefore, the different fiscal policies implemented by the numerous member nations resulted in different impacts of the financial crisis in 2008. In order to overcome the differing monetary and fiscal policies in the region, the member nation signed the Stability and Growth Pact to have a fiscal discipline and keep the debt levels and budget deficits within acceptable limits. However, the pact failed primarily due to a lack of commitment on part of the member nations and they continued to violate the condition set under the pact. The commission in charge under the pact proposed a one-size-fits-all policy which was inappropriate and unpopular because the member ...Download file to see next pagesRead More
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