International Finance - Research Paper Example

International Finance Question 1: The euro was formed because as a single currency for the euro zone since it provides more merits and benefits as compared to when each nation possessed its own currency. The benefits of the euro to the region’s affiliate states can be viewed from two perceptions. This involves the viewpoint of the individual nation and from the outlook of the euro zone as a whole. The meeting practice for the euro region entry is intended to ensuring that participation in the euro zone offers merits to all members. The euro helps to eliminate the fluctuation rates and exchange costs, strengthen one market as well ensure close co-operation among affiliated states for a stable currency and economy. When the EU was established in 1957, the affiliated nations were focused in developing a common market for dealings. Nonetheless, with time they realized that closer economic and monetary collaboration was required tom flourish the internal market as well as ensure increased development and generate additional jobs and greater opulence for the populations (Carbaugh, 56). Starting with the euro zone, monetary union represents the completion of the internal market in the EU, offering full price and cost transparency to the single market for products, wealth and labor. The euro has resulted, in the stability of the exchange rate in the region, which supports trade, and allows economies of scale, to provide an atmosphere that is conducive, for the effective allocation of resources (Sinn, 232). It also offers the ordinary citizens, the most remarkable merit whereby they are no longer supposed to exchange currencies when travelling within the euro zone. It has as well ensured that the region enjoys monetary stability, while decreasing inflation and convergence of lasting interest rates to the decreased degrees existing in the states that comprised the maximum monetary policy credibility before the euro was established. The individual nations within the euro zone are liable to benefit from the euro will enable them to obtain more options and stable prices for consumers and customers. This can be achieved, since the single currency, assists in eliminating the individual currency instabilities. This is because, the euro has a superior credibility, and it is applied in a large zone, without speculation and competitive devaluation, as witnessed in individual currencies. By ending the internal currency instability, and decrease of external currency instability, would allow exporters to scheme potential markets, with superior conviction (Donahue, 1). Another benefit for the euro members is that it offers safety and extra prospects for trades and markets. This is critical in protecting the individual countries against international disturbances, which mostly result to external shocks and disproportionally affect the small national economies of the affiliate members. Additionally, the member states stand to benefit from the enhanced economic solidity and growth. This will be achieved by the euro helping in eradicating trade rate volatility and offering total price transparency, thus resulting in advanced forces, which allow for the economic activity to be carried across the borders. Also, the member state will benefit from the incorporated monetary markets as offered by the euro. Trade integration in the euro area had rapidly increased within the euro zone more so in the intra-euro dealings and foreign direct investment. This has ensured that increase in exports and imports of products have been on the high thus benefiting the members. The single currency has been integral in fostering the elimination of risks arising from the exchange rate (europa.eu, 1). The member state will also benefit from a stronger presence for the EU in the global economy. This is possible since the euro is a wide and open trading bloc. This allows business conducted in the region a capturing preposition for other international nations, which can enter the market using one currency. Furthermore, the nations will be a tangible sign of European identity. This will establish the European region as an entity in the world economy thus allowing it to compete favorably against other global currencies. Thus, by trading as a block the European governments are able to save funds unlike when trading as an individual state (Hughes, 9). Question 2: The possible costs anticipated A series of monetary hardships that commenced in the year 2002 built up a European financial impasse, as well as, escalating money owed that was experienced by the financial institutions and governments of numerous European countries. It is supposed the failure to control the debt resulted to the financial quandary that extended to grave percentages. By the year 2011, sixteen of the European countries were burdened with debts. That is because they have the same monetary currency and encompass closely associated economies. A progenitor of the financial problems commenced in the year 2002 when Greece and the other fifteen European countries were engaged in the assumption of the widespread utilization of the financial unit, which is better known as the Euro. The widespread distribution of the Euro brought about the increase in the interest rates. The increase consequently caused the plummeting of the property and housing markets continued growth at an astounding rate. Unfortunately, as such the prices of homes shot up with numerous individuals looking to purchase homes by borrowing hefty summations of currency from the pecuniary institutions which these individuals could not have the capacity to return. Consequently, that led to the creation of a substantial instability in the financial system (Siegel, 1). Leaders of the government, financial experts, and financial institutions were consequently forced to undergo the fundamental actuality that the institutions concerned with the provision of financial services could not be effective in their objectives supposing the money owed to them was not paid back. Nevertheless, the financial institutions were placed under massive sums of debt as the majority of the consumers failed to service their loans, as well as, mortgages. There was no way these financial institutions could realize profits from their operations if they could not also offer an extension to loans as was the custom. Therefore, the economic growth was liquidity level of numerous commercial ventures that were dependent on the financial institutions advances, were hit the greatest by the unfolding economic crisis situation. For consumers who were looked forward to purchasing homes could not access loan services with the housing sector doing away with other factions such as the salesmen, construction workforce, and many other segments in the housing market that were rendered immobile. The impact of the crisis resulted in the massive layoffs of happening to the workforce as the effects of the shrunken financial system could then be sensed by every citizen. Question 3: Examining why Greece (and a few other countries) are considering the costs very high In an endeavor, to find a solution to the concern of the financial crisis, the various governments involved, including the Greece government, engaged in large expenditures of finances to resolve the developing financial crisis. The governments have also spent finances in a bid to prevent enormous dismissals and the creation of fresh pension schemes. Greece, in particular, had previously managed the country’s finances badly and was involved in the expenditure of massive sums on projects, case in point being the 2004 Athens Olympics. In an endeavor to hide from the public about the mismanagement of finances, the Greece government had resorted to paying up Goldman Sachs so as to conceal the truth from the public glare. The economies hard hit were experiencing grave financial constrains. The public ultimately came to know about the situation of Greece, as well as, that of other countries regarding the difficulties they experienced in servicing the money owed to various financial institutions. The potential investors, who looked to invest in the various economies, came to be aware of the potential threats. The defects that the Euro currency unit posed were comprehended by those looking to invest. This was enabled by the trace to key limitations of the government’s license in employing a fixed unit currency. The fixed currency did not bear any fiscal expenditure controls limitations in the accumulation of hefty debts. The effect the crisis had led to the deterioration of the stock market as the worth of the stocks flopped. This resulted in the confidence level of the consumer going dwindling (Carbaugh, pg56). Therefore, the consumers put a stop to the expenditure they incurred with the financial institutions also failing to give out loans. This made the financial crisis deteriorate resulting in a grave financial upheaval. The effects of the fiscal upheaval spread universally leaving Greece and other countries negatively affected. Economic analysts have managed to employ the numbers from the accounts and finances to establish the harshness the financial crisis had on Greece, as well as, the economies of other counties. Obscured figures of either finances or accounts from the application of accounting techniques demonstrate an unrealistic representation of the economy’s status. Therefore, the forecast predictions that were given by the government were unrealistic as they presented the economy to be well off than it essentially was. Case in point was the application of ineffective accounting techniques in the period of the financial institutions’ ensuing meltdown of the year 2008. Under the most ordinary accounting applications, the economies should mark the various assets in relation to the present value of the market. Unfortunately, the financial institutions were indisposed to using the mark to market procedure for the worth of mortgages that were mortgages of the subprime nature as that made the financial institutions appear as bankrupt. Therefore, some of the financial institutions did not succeed in including the value of mortgage on their financial books. Question 4: Possible Options to Solve Greek Crisis Political instability in Greece has resulted in the crisis to intensify, for numerous months, and economists at the Bank of America have predicted that by the end of July, Greece could have used up all their money, if the crisis worsens. Greece and the Euro zone are provided with three options to solve the crisis. “Grexit”- Exiting Euro zone The first option that Greece has is to exit the region and apply the novel weaker drachma so as to increase exports. There are two ways Greece can achieve this option. First, it can redenominate all the Euros into a weaker currency. However, this may result in the Greeks having a bank run on their euro deposits and smuggling them to other nations (Lapavitsas, 1). It is exceedingly problematic to prevent people from taking the Euros in and out of their countries. Also, Greece can do away with the Euros, and begin issuing earnings and bonds, in the drachma. Like all other developing countries, the Greeks have their own currency, but they do business with the USD. However, this will only result in complicating the situation. If Greek takes this part, it will have severe, damaging effects on the Euro zone. The question of Greece leaving the Union something that Germany has been advocating for a long time. However, some countries such as France are against this move, claiming that such a step will be detrimental to the region, as it will seem that the EU is stagnating in backing Greece. Even international organizations have called for slow down in the austerity of struggling nations such as Greece (Parliamentary Assembly, 123). The wide arrayed contagion outcome is immense, and next targets for default are probably to be Spain or Italy whose borrowing rate is expected to rise. Although the ECB promises that it will strive to guarantee that the euro stabilizes, it appears that the downturn will dampen when Greece defaults. Greece Accept Austerity Condition, Receive Bailout and sell State’s Assets According to economists from JP Morgan there is 50% likelihood for Greece to exit the Euro zone within a span of one year. Nonetheless, if Greece acknowledges the austerity arrangement, it will benefit by receiving their subsequent payment. This will assist in lessening the crisis; thus, help them get a steady bailout from their partner. Although, this seems unlikely to happen, since the expected future Prime Minister, Alexis Tsipras is strongly against the arrangement of selling the state’s resources (Siegel, 1). The Prime minister claimed that if members of the euro zone establish their plan to stop aid to Greece, the nation would stop its debt imbursement. Several investors believe that the cost of letting Greece fall is too immense, it is estimated to be around € 1 trillion, and therefore, they conclude that the other members of the Euro zone should put their efforts in saving Greece. However, others dispute this notion, arguing that the cost associated with saving Greece are even immense than saving Greece. Nonetheless because of the great uncertainty, the exact figure of cost as has not been estimated (The Gallup organization, 10). European Central Bank’s Long-term Refinancing Operations Since 2008, ECB has implemented two LTROs with an aim of lending more money from the private sector in the country that requiring it, such as Greece, Spain and Italy. However, until now, the finances have been spent to finance beneficiary banks’ debt rather than leasing it out. A number of people believe that, with the third LTRO, banks will be capable to lend money to the private segment, therefore stimulating the economy. Conversely, this strategy is hazardous since it not only contradicts with the core purpose of ECB, which is control inflation; but also encourages the banks to take risky decisions. However, German and Finland are against such an arrangement, because they feel that the northern creditors are eventually liable for the easy profit amassed, by southern European banks. Question 5: The ideal solution The ideal solution would be for the ECB and other banks loaning finances to private entities to stimulate the economy. This will assist in sharing the burden the country is facing thus preventing further recession. This is because the austerity measures and privatization policies have not addressed the crisis fully. These policies only result in the continuation of the crisis as well as intensify recession causing further negative development as well as exiting the recession is not a reasonable scenario. It is evident that different approaches, which have been so far applied, there is no ideal solution to satisfy both sides, since the decision always relies on ideological beliefs, objectives and viewpoints of individuals. Works cited Carbaugh, Robert J. International Economics. Mason, OH: South-Western Cengage Learning, 2011. Print. Donahue, Patrick. Greek Exit Weighed by Euro Officials. Bloomberg Businessweek. May 14, 2012. Accessed at, < http://www.businessweek.com/news/2012-05-13/euro-officials-begin-to-weigh-greek-exit-from-common-currency > Economic and Monetary Affairs. European Union. 2012. Accessed at, < http://europa.eu/pol/emu/index_en.htm > Hughes, Kirsty.Tuekey and the European Union. Just another enlargement? Exploring The implication of Turkish accession. 2004. Pp 1-42. < http://www.cdu.de/en/doc/Friends_of_Europe_Turkey.pdf > Lapavitsas, Costas. Greece is heading for hell, thanks to the EU's botched handling of the crisis. The guardian. 19 march 2012. Accessed at, Parliamentary Assembly - Working Papers - 2008 Ordinary Session, Fourth Part, 29 September- 3-October 2008 - 2009. Council of Europe, 2009. Print. Siegel, J. Jeremy. Devaluation – last option to save the euro.Ft.com. The Financial Times Limited May, 22, 2012. Accessed at, < http://www.ft.com/cms/s/0/8626a02e-a35d-11e1-988e-00144feabdc0.html#axzz1wTh0A5VM > Sinn, Hans-Werner. Casino Capitalism: How the Financial Crisis Came About and What Needs To be done now. New York. Oxford University Press. (2010). Print. Top of Form The Gallup organization. Examining the Social and Political Impact of an Unprecedented Austerity Programme. Eurobarometor. European commission. 2006. Pp 1-24. < http://ec.europa.eu/public_opinion/flash/fl193_sum.pdf > Read More