Financial Crises and Recession in the Global Economy - Essay Example

MACRO AND MICRO ECONOMICS By Macro and Microeconomics The article in The New York Times en d “Next timeGreece may need new tactics,” explains the state of Greece economy, detailing the extent of the debt that has provoked an economic crisis in this country. Although few indicators suggested something was wrong, the debt kept increasing causing social unrest that threatened the future of the euro. A change in government revealed the worst news expected by Greece people that their country had sunk into big deficits and only managed to stay afloat because of bailout packages from Europe and France. Sadly, Greece cannot now maintain its euro as the ratio of debt to domestic rise to 151% in 2012 and expected to remain at 149% in 2013 (“New York Times,” 2012, p.1). The big question is whether Greece will manage to get out of this major recession or it will result in an economic depression. The year 2012 was big for Greece as economists figured out different ways of getting Greece out of recession and out of debts. Lucas Papademos, Greece prime minister gave hope to the nation of new opportunity to use the saved interests and debt repayments. In March 2012, the country expects European officials to sign 130 billion Euros that Greece needs in stopgap financing. This will help Greece negotiate a landmark debt restructuring deal with its private lenders. The move will also help clear way for European commission, European Central bank, and International Monetary Fund to begin releasing fund to Greece. One worry with the government is that the big money coming in to Greece ended up in the pockets of troika leaving the country in enormous debts and less chances of growth. Greece could not even pay for its vital public services. By July, pressure was building up as Germany officials spoke of a possibility of Greece leaving Euro in fall. Greece was in dire need of a better fiscal policy that would get the country out of the current crisis. The government had hoped to make a better deal to solve the crisis with the involvement of the private sector. Apparently, they have refused and the government cannot force them to do it since the Greek law does not govern their bonds. Worse still is the fact that investors would sue the government for trying to impose the deal on them. The fact that public sector is now the biggest creditor gives an opportunity to the creditor nations of taking collective steps of assisting Greece government before the next crisis hits in. However, this may not yield much because Greece government traded their ability to write down debts to private sector creditors. This leaves the government with low interest loans that is irreducible. The task of reversing the negative trends in an economy, according to the report, must involve the efforts of the respective governments in drafting various legislations that would help in correcting some of structural causes of the recession. In essence, the article points to some of the local and global issues that determine the negative effects of recession. Poor governance and fiscal policies depress an economy leading to recession. Generally, such issues are anchored within the framework of the micro-economic and macro-economic issues that determine the trend of growth in the affected country. Such issues are necessarily related to a range of concerns that determine the connections and linkages between the countries in the Euro zone. For instance, an economic crisis in Greece affects all the Euro zone economies especially in the strength of the Euro. This makes all the Euro zone economies to rise up and help their counterpart nation rise again. Before The Crisis Before the economic crisis in Greece in 2009, the country was one of the fastest growing countries in Europe. It was growing at an annual rate of 4.2% in comparison to 1.9% in other countries in the Euro zone. Its rate of unemployment went down by 2.9% to stand at 8.3% in comparison with the rate of 7.4% of other euro zone countries. This enormous growth was driven by rapid domestic demand supported by expansionary fiscal policy as reflected in the public deficits exceeding the EU stability. It was further boosted by expansion of credit to households and private businesses (Athanassiou, 2009, p.364). The level of debts did not match the net savings in the Greece economy, which were average. The country had many external debts leading to poor balance of payments. One would wonder how the country’s growing imbalances continued for such a long period before anybody would actually act. This was not easy to note since instead of the Euro falling it went up by 17% (Athanassiou, 2009, p.364). Other than the methods used by the Greece to curb inflation in the country, dropping of the exchange rate would have a positive effect on the interest rates. This is because it would discourage Greece people from accessing more loans reducing the level of debt and thus improving the balance of payments. Recession Stabilizing the Euro zone would require more action on the fiscal state of the constituent country and the improvement of the medium-term growth aspects in strategic and systematic reform strategies. Broadening the single market through the introduction of alternative activities such as the trading in services will also work (Lapavitsas, 2012, p. 86; Lynn, 2010; Mody & Sandri, 2011). These strategies are necessary in order to shield the regional countries from sliding in a recession that would prove difficult to overcome. The creation of a stable trading region would involve the combining of a range of strategies that require multiple programs for stabilizing the weaker partners in the union. To a significant degree, the threat of a recession in Greece, as spelt out in the report has connections in structural factors of the constituent countries than on other matters of economic growth. For instance, the challenges affecting the harmonization of the common currency relate to the fact that the internal legislations and other structural obstacles in the European Union member countries made it difficult for the harmonization of the process. As a result, the operations of the strategy have been rendered difficult leading in the challenges of debt that continue to face the country of Greece (“Council On Foreign Relations,” 2010, p.1). The projected reduction in the GDP of Greece is one of the outward manifestations of the challenges that relate to the failure for country to develop reliable structures that can streamline its internal and external operations. Fiscal policies differ depending on what a country endeavors to achieve and thus not one that can suit the all the nations in a Euro zone or in another zone. One reason is that many countries find it difficult to adopt the policies of a uniform market for fear of exposing their internal systems to the threat of competition (Lorca-Susino, 2010; Authers, 2012). Economic systems are usually dependent on the external and internal forces (Habermas, 2012). For instance, Greece economy now depended on how fast and well the country and its people could pay external debts they owed to other countries and to their local lenders. A recessionary gap exists in that the level of aggregate production is much less than what a full employment would produce. Besides the methods Greece used to close the recessionary gap, the government would also have bought treasury securities in the open market, lower discount rates, and reduce reserve requirements. Changing of the trends on the common market remains one of the most important strategies that require the attention of the policy makers. Essentially, there has been comparatively lesser initiative of investing in the service sector. Such gaps lead to the loss a significant part of a country’s market. One of the net effects is low levels of employment leading to a slump in the regional economic growth. As such, much of the challenges facing the Eurozone and the United States are structural. Revamping the economic structures in the relevant markets remains an important step towards addressing the internal and external threats of a recession. From the Graph, an increase in government spending from Y to Y’ will result to an increase in prices from P to P’. On the other hand, if the government increases its spending by a certain percentage the aggregate demand (AD) curve will respond by moving outwards to AD’. A reduction in government spending will go inwards towards AD (“Market Monetarists” 2012, p.1). Government spending works hand in hand with the central bank monetary policies to reduce the money base to curb any inflation effects. A fiscal tightening may fails to cause a drop in AD if the Central bank covers the short fall. Inflation and Currency strength From Greece economic crisis, we learn of the forecasts and remedies that to mend an ailing economy. On this score, inflation is one of the prevailing challenges in Greece because of an ailing economy (Arestis, & Sawyer, 2012, p. 56). The intervention of the entire Euro zone depicts the challenge that Greece as a country would pose on the entire Euro zone if it were to collapse. Focusing Greece economy from a global perspective provides resourceful leads that highlight on the various challenges that relate to the connections and linkages it has with the Euro zone. It also helps in enabling an evaluation of the specific challenges of different countries in terms of how they connect with external forces within the context of globalization and liberalization. The challenges of a recession in an economy are not new to many countries especially with the onset of globalization. Globalization creates unique opportunities for countries but also brings about certain challenges that require the attention of policy makers and governments. In periods of recession, millions in the country lose their jobs from falling businesses. Inflation is high with the cost of food and other basic commodities going up every single day, hour or even minute. Businesses take advantage and hike prices of commodities, as the government is unable to control it. Eventually, the many unemployed people take to the streets protesting unbearable cost of living and loss of jobs, calling the government to act. People of Greece engaged in violent attacks in an effort to make the government make some policies that would favor them. The economy remained stagnant despite several efforts to cause some growth. At times, fiscal policies may not bring some desired effect immediately on a nation, which calls for the economists to come up with some better plan. The graph represents a monetary fiscal policy used to affect money supply and demand in the market. The Monetary demand represents consumers borrowing on cars, homes, and other household items and government borrowing to finance financial debt. The central bank and other government institutions make policies to affect the amount of money in supply. In times of inflation a lot of money is in circulation and the government working together with the central bank will pass some policies to reduce the money in supply. One of them is increase in central bank rates, which consequently increases the bank lending rates. This discourages consumers to take loans to spend on unnecessary items. Through controlling inflation, the currency strength goes up (“Econedlink, 2013, p.1). Taxation and employment From the graph an increase in taxes, lower disposable income. When the government collects more money than it spends, the equilibrium level of GDP decreases because this reduces disposable income and slows growth. A reduction of the same will boot a sluggish economy and reduce the level of unemployment (“Infoplease” 2013, p.1) The government uses Taxation fiscal policy to bring about changes in business. That is, the government will reduce taxes to avail more money for businesses to invest. In addition, households will have more money to invest privately too. Therefore, the level of employment will go up as a result. The legislation creates opportunities that would spur economic growth and protect the economy from sudden shocks that would trigger a series of reactions, which would eventually culminate into recession within Greece. The move will protect working group who are considered, as some of the beneficiaries of the new legislations would be protected from a tax regime that has often favored the wealthy. To a significant degree, changes in a taxation system are designed to increase economic growth. Economic growth, under the conditions prevailing in the Euro zone, must involve structural adjustment of the systems. It must entail a realignment of the internal and external systems of Greece economy. To increase employment at times will call the government to increase spending on infrastructural development. Changes in policies on taxation, investment, and spending patterns would make it possible for Greece to avert the threat of recession (Peláez, & Peláez, 2007; Allen, 2000). It becomes important to determine the level of intervention that would be necessary to correct the anomalies within the global market as detailed in the report. This is because any direct forms of legislation have to be conducted in ways that accord with the basic principles of liberalization on which the common market is anchored. The internal connections in the structure of the common market also contribute both positively and negatively to the threat of recession (Naas, & Lysne, 2010; Rasmus, 2010). For instance, the strategy to reduce the government spending often leads to joblessness and a reduction in the efficiency of services (Lossifov et all, 2009, p. 50; Haberberg, & Rieple, 2007, p. 14). Works Cited Allen, R, E 2000, Financial crises and recession in the global economy, Elgar, Cheltenham. Arestis, P, & Sawyer, M, C 2012, The Euro crisis. Houndmills, Basingstoke, Hampshire, Palgrave Macmillan. Authers, J 2012, Europes Financial Crisis: A Short Guide to How the Euro Fell Into Crisis and the Consequences for the World, FT Press, New York. Castle, S, O.E.C.D., Slashing Growth Outlook, Warns of Global Recession, The New York Times, 27 Nov, 2012. Council On Foreign Relations 2010, Crisis in the Eurozone: transatlantic perspective, Council on Foreign Relations, International Institutions and Global Governance Program, New York. Haberberg, A & Rieple, A 2007, Strategic Management: Theory and Application, Oxford University Press, Oxford. Habermas, J 2012, The Crisis of the European Union: A Response, Polity, New York. Lapavitsas, C 2012, Crisis in the Eurozone, Verso Books, New York. Lorca-Susino, M 2010, The euro in the 21st century: economic crisis and financial uproar, Ashgate Publishers, Farnham. Lossifov, P, et all, 2009, The International Financial Crisis and Global Recession: Impact on the CEMAC Region and Policy Considerations, International Monetary Fund, New York. Lynn, M 2010, Bust: Greece, the Euro and the Sovereign Debt Crisis, John Wiley & Sons, Bloomberg. Mody, A & Sandri, D 2011, The Eurozone Crisis: How Banks and Sovereigns Came to be Joined at the Hip, International Monetary Fund, New York. Naas, B, & Lysne, J 2010, Financial Markets and the Global Recession, Nova Science Pub Incorporated, New York. Peláez, C, M, & Peláez, C, A 2007, The global recession risk: dollar devaluation and the world economy, Palgrave Macmillan, New York. Rasmus, J 2010, Epic recession: prelude to global depression, Pluto Press, London. Athanassiou, E 2009, “Fiscal Policy and the recession: The Case of Greece,” Economic Trends Journal, Vol. Nov/Dec, pp. 364-371 “New York Times” 2012, “Next Time Greece May Need New Tactics,” Viewed on 4 January 2013, “Market Monetarists” 2012, “The Bundesbank Demonstrated the Sumner Critique in 1991-92,” Viewed on 4 January 2013, < http://marketmonetarist.com/2012/08/18/the-bundesbank-demonstrated-the-sumner-critique-in-1991-92/> “Econedlink” 2013, “Fiscal and Monetary Policy Process,” Viewed on 07 January 2013, “Infoplease” 2013, “Fiscal Policy and Economic Growth” Viewed on 07 January 2013 Read More