Europe in the International Economic Order - Research Paper Example

 Europe in the International Economic Order The financial crisis in Greece - a threat to the international position of the Euro Introduction The idea behind introduction of Euro, about a decade ago, was to prevent the host country of the single currency to take advantage by printing and inflating its currency and thus to promote healthy competition. There were speculations about the international role of this single currency and its position of challenging and competing with the mighty dollar. Since its inception Euro had surpassed the expectations of even its supporters and has evolved as one of the mightiest currencies, so much as so that it has even surpassed dollar at some measures, moreover Euro is the second most used reserve currencies in the world accounting for about 26% of the worlds official reserves. The European Union was formed with the aim of strengthen the economic and political powers of the European countries and emerge as an international superpower. The emergence of Euro is also a part of this project. Euro was introduced as a common currency for the participating European nations to remove the exchange rate risks within the internal market, to boost up trade across nations and most importantly to bring in monetary stability in Europe. (Fedee, n.d.) Other major purpose was to challenge the increasingly monopolistic power of the currency dollar as a single international currency and to rescue its members from the fluctuations of dollar. The introduction of Euro has been the most important development in the international economy; it has become the major medium of trade especially in the euro area and other European countries. “ Euro has played a major role in fostering harmony among diverse economies, which had conflicting monetary and fiscal policies, tariffs and other restrictions on trade and investments” quotes Haruhiko Kuroda, head of Asian Development Bank at this years Brussels Economic forum (Vucheva, 2009). The Euro zone formed covering 11 countries in 1999, “Belgium, Germany, Spain, Italy, Ireland, Luxembourg, the Netherlands, Austria, Portugal and Finland” (Q&A: Euro basics, 2002). Greece was allowed to join only after 2001, later Slovenia Malta and Cyprus followed the suit, Slovakia became the 16th country to join the group. (Vucheva, 2009) Joining Euro zone it had the advantage of trading its inflation prone home currency to the stable Euro. It also gained an upper hand in the borrowing activities, which led to a increase in liquidity in the market which in turn improved the standard of living of the Greek citizens. Loans for individuals, governments as well as corporate houses were available at very low interest rates, which are available only among the developed nations like Germany. (Fraser R & Morley R, April 2010). Euro was termed as one of the greatest success stories of European integration, by the chief of European union stating that it had helped the countries using it to react in an effective manner during the global crisis. It was also termed as “the anchor of stability” and "unquestionable success," by Mr Juncker. (Vucheva, 2009) He also voiced that the member nations lack a common international interest, they are more keen to look after their national interests. The Euro’s international role is expected to grow gradually by progressing by creating integrated and liquid financial markets. Although the euro zone has almost equal economic strength as the United States of America but experts comment that the economic strength alone does not provide economic power it needs to be associated with determination. It is important for the world economy that European Union develops a leadership sense to compete with the US economy and only then the euro can act as a stabilizer in the international economic system. Around 330 million Europeans are using this common currency now. Since a decade from its inception the Euro is facing serious problems, which are the results of the recent economic crisis, which has affected the economy of Greece, one of the members of the Euro Zone, badly. There have been warnings that if the situation of Greece is not handled properly the Euro zone could break down, as well as face major inflation, which could have direct consequences on the other 15 nations using Euro. In this paper we analyze the position of euro in the recent times after the financial crisis of Greece, and what threats it poses to the international position of Euro. Consolidated position of Euro in the world Economy: Since its inception the Euro has established itself as a consolidated world currency, its acts as stability measure in the world economy and also as an inspiration for other regional economies. There were speculations about the survival and growth of this single currency with an international status, in today’s date Euro as evolved as a major financial global currency, with shares in international and corporate bonds and accounting for almost one half of the world stock. It is also one of the most actively traded currencies in world foreign exchange markets. It is also a major medium of trade internationally and is used as a medium of trade not only in the Euro based nations but also in the neighboring and other transition nations. The international role of Euro also acts as the stability measure in the world macro-economic framework; the size of Euro financial system and its area is comparable to US economy. The EMU project also acts as a source of inspiration for the entire regional cluster all across the world for their economic and financial integration as well as monetary union. “There is no EU policy aimed at ‘exporting’ the euro model to other regional blocs. Each region has its own unique conditions and the European union’s experience is not necessarily applicable elsewhere,” notes De Lecea. “But other regions can draw lessons from our experience and we are co-operating on financial and monetary integration issues with our ASEM partners in Asia, the MERCOSUR countries in Latin America and the Gulf Co-operation Council (GCC) in the Middle East.” (European Economy News, Oct 2008). It has also helped to promote financial security and economic prosperity among European Nations, as studied by the Asian Development Bank. The Euro also plays a harmonizing role in diverse economies with conflicting policies in the areas of trade, tariffs and investments. The status of single international currency has earned benefits for the Euro members by attracting investments from EU as well as globally. It also helps in widening and deepening of Euro’s financial and monetary markets globally. Trading in a single currency if trading partners a ready to accept and make payments in Euro also reduces the cost of international trade. The available evidences suggest that the Euro has benefited the worldwide economy by acting as a much-needed anchor during volatility of dollar in the recent times. “The diversification advantage of the euro has brought with it a large measure of global stability,” explains de Lecea (European Economy News, Oct 2008). The global status of Euro is associated with risks as well as responsibilities. The Euro area can be susceptible to economic shocks, which can reduce the stabilizing influence of Euro, if left unmanaged. The euro has an important international role but our presence in international foray is still very fragmented,” observes de Lecea. “We have responsibilities towards ourselves and the rest of the world, so we need to rise to the challenge.” (European Economy News, Oct 2008) Also it was proposed that the Euro area should be participating actively in the financial and economic governance internationally, this would help in consolidating area representation of Euro in international scenario. Euro’s role internationally is expected to grow gradually but its progress is related to a number of factors including progressing in creating liquid and integrated financial markets in its area. It is expected that the market forces would be favoring dollar for the initial time period, but gradually the market would move towards a more symmetric system where both the major currencies would be acting as the international currencies. (European Economy News, Oct 2008) The financial crisis of Greece: The analysts have considered Greece as one of the vulnerable states during the global meltdown, the speculators believed that it could default its debts, which would in turn result effect the value of euro by pushing it downwards. Over few years the Greek government had been financing a large part of its expenditures on public services and government approved privileges like pensions by borrowed money. The serious problem behind this was that these borrowed money poured in pensions and building of universities created no wealth. During the year 2010 the budget deficit was estimated to be 12.7% of the GDP that estimates to the total output of the year 2009, according to a consulting company Oxford Economics the debt to GDP ratio is estimated to be over 120 percent in the current financial year, adding to this hosting the 2004 Olympic games had also proved expensive for the Greek economy. During the last year the government tried to brush up the problems by transferring debts from the balance sheets of the private broken organizations to balance sheet of the public organizations, so that they could service the cash demands of these debts through new public borrowings, but even this didn’t last long as the public borrowing also has a limit and a saturation level. In this context an international fiancé expert Satyajit Das remarks, "At some point, smart people won't buy new debt that's sold to refinance old debts, and governments will have to pay up with real money -- and they can't do that without massive tax increases, which are considered politically impossible, if not suicidal. The people say it's not their fault that their government got into this mess, and they won't pay for it. It's explosive.'' (Markman, 2010). The Greece government had been struggling to convince its lenders its plans to cut down its deficits, but it had been of little help as the current and future lenders had been showing reluctance to forward more debts to the nation, which resulted in pushing up the price of borrowing. So, funding of expenses became very difficult and had led to a direct impact on the commoners through loss in jobs and increase of taxes. The unemployment rate in Greece rose to 7.4 percent, official figures showed 363,869 people unemployed, (The impact of financial crisis upon the economy, January 2009) the economy expanded 2.5 percent as compared to the 2.7 percent forecast. Surveys also suggest that hiring projections are show-weakening trends. Greece was the worst hit by the global recession among all the other EU members. Industrial position in Greece fell by 3.3percent for four consecutive months. The manufacturing and hospitality industry has also shown the signs of the meltdown by freezing its hiring plans. The scenario is such that 13 percent of the 751 employed workers are preparing for a layoff, according to a survey conducted by manpower. (Karantinos, Jan 2009). The tourism industry is one of the major economic sectors in Greece, with the economic crisis emerging there was a huge drop in the tourism industry as Greece had become very expensive for the citizens traveling from European Union nations which further lead to the increase in public deficits as the government was unable to meet up with the expenses. (Belien, January 2010) The Greek economy was growing at a faster rate than the others in the Euro zone, after the slump it has been showing clear signs of slowing down and the slowdown in the construction sector is a visible measure of it. The economic conditions are expected to deteriorate as the economy faces a cash crunch and the lenders plan to freeze the finances provided to the small business houses and traders. To tackle the crisis the government plans to pump in cash approximately amounting to 28m euro to help the credit institutions to lend generously to the firms and increase the liquidity in the economy, the government is also taking strong measures to prevent hoarding. The government also plans to inject capital in the economy through different measures like sale of shares to the states, providing guarantees on debts issued by the banks and providing liquidity support by issuing government bonds. To deal with the unemployment problem the government plans to distribute unemployment benefits to the firms hiring the eligible unemployed. Further the government also plans to provide in house training and employment subsidies for small and medium enterprises. To bail out public deficits the government also plans privatization of certain major sectors like telecom, further it has also tried austerity measures by modifying the pension plans. It has also tried to strengthen the small and medium enterprises by providing cheap loans at government determined lower interest rates. Helping the tourism industry by providing liquidity and helping in cost cutting measures. Cutting down the government expenses by deductions in defense and other government budgets. Other measures were also taken to bring the expenditure down but the falling revenues outpaced the expenditures. (Hopkins, Feb 2010: Streich, March 2010) The European National Bank (EIB) has planned to provide 1.2 billion Euros to the small and medium business enterprises of Greece to boost the firms in the year 2010, to meet the monetary needs of the small firms as the banks tighten the flow of cash. (Karantinos, Jan 2009) The government has also provided with lump some payments and compensations to meet the immediate needs of the public. The financial crisis and the International position of Euro: The financial crisis of Greece can considerably affect the credibility and value of Euro. If the Greek economy collapses it could create ripples and trigger similar situations in Spain, Italy and Portugal. “Further revelations shows that the conditions were already weary long back during 2001” according to Diana Johnstone, “Goldman Sachs assisted the Greek government in manipulating data to join the Euro Zone.” (Johnston, March 8, 2010) Though Greece is a comparatively smaller economy in international terms, still its crisis is spreading panic as it risks the stability of a single currency that is Euro. This threatens with a full-blown crisis on this currency. This debt crisis may deflate the Euro below the key level of $1.29 first time in the decade, since the inception of the euro currency. The Euro zone economy faces fresh challenges in the months to come. Help has been bailed out from Euro zone to keep the euro stable. Greece cannot be split out from the 16 group member of the Euro zone as it would attract the speculators attention towards the public deficits of larger nations like Spain and Portugal, giving the Euro project a big blow which may lead to its falling apart. (Hopkins, Feb 2010), Alan Ruskin, head of currency strategy at RBS Global Banking & Markets, flagged $1.2330 and $1.1650 as key targets. He said if Greece defaults or restructures its debt, the single currency could trade as low as $1.10-$1.15. Kenneth Broux, an economist working for the Lloyds Banking Group of London, said $1.25 is "the next big level on the downside." (The Economic Times, May 6, 2010). A currency strategist at BNY Mellon said, “The dollar is the safe haven of first choice.” (The Economic Times, May 6, 2010) The dollar got a boost of this and the US economy showed signs of recovery but at the cost of European economy. The Euro has slumped a new 13 month low and speculators predict that the Greek financial crisis could spread among other European nations and could affect other countries having debt related issues. A global rating agency warned that the Greek crisis could worsen and directly affect the monetary and banking systems of European nations including United Nations, Spain and Portugal. The government bond ratings of Portugal could suffer a possible downgrade due to insufficient public finances. This was followed by degradation of Spain and Portugal’s financial strengths ratings by different rating agencies citing reasons of deficit public finances. There are doubts over the effectiveness of the Greek government’s austerity measures and viable implementations of announced plans. Greece has secured a 110 billion pound rescue package from the Euro zone members and the International Monetary Fund, yet fears of Greece crisis impacting the other Euro Zone countries have increased in the recent weeks. (The Economic Times, May 2010). The bankruptcy and weak financial situation fears of Greece has led to drop in the value of Euro, further this was aggravated when the two strongest euro zone countries announced of not helping in the bail out of Greece. Moreover countries like Germany which in the pre–euro days had the strongest currencies in the Euro zone members are badly affected by crisis with drop in the GDP and export rates and are not in the condition to lift countries like Greece out of the recession at their own expenses. The unwillingness to help Greece to bail out from the crisis by the Euro zone nations is also due to other reasons like the huge unemployment rates in the euro zone nations, one of the highest figures since Euro was introduced as a single currency a decade ago and the anger towards Greece as till last few years it had tried to cover up its weak financial conditions by showing up figures better than they actually were. (Belien, January 2010). One of the other major reasons of worsening of the Greek crisis and along with that the position of Euro is a lack of unified fiscal policy among the Euro zone nations, which lead to diversification of bond, yields across the euro nations. The financial, deposits and debts ratings of a number of Greek banks were degraded due to their weak financial position. The Greek economy faces a continuing growth challenge. Greek is a major investor, host and donor to several thousand economic migrants from nearby regions. (Fotiadis, March 2010). The banking sector of Greece is spread into the neighboring countries of Greece. The Greek banking capital was used in big and small food processing retailers, clothing and textile industries in Bulgaria and Albania. Major investments in the sectors of telecommunication, energy and construction are also made in the neighboring countries. Greek banks are penetrated deeply in the banking system of all the Euro zone nations and had developed 20 subsidiaries with 1900 branches in Balkan Countries alone. Charalambos Tsardanidis, director of the Institute of International Economic Relations in Athens, says: "By around 2005 business investment in the Balkans, including telecommunications and petroleum, mounted to 3.5 billion dollars, creating jobs for tens of thousands of native workers". (Fotiadis, March 2010). The Greek nation hit hard by the global recession has adopted restricted the lending policies and are also re-evaluating their plans of investments. Dardan Velija, previous integration consultant to the prime minister of Kosovo’s, told IPS. "Albania has a large Diasporas in Greece, which sends money back home and the Greek banking sector is spread into the neighboring countries of Greece" (Fotiadis, March 2010). This Greek crisis is posing a straight risk to the constancy of the European Monetary Union. According to Angela Merkel, the German Chancellor, Europe’s destiny is at risk in this crisis and other countries can be affected unless Greece is completely bailed out of this crisis. (Aljazeera.net, May 5, 2010). Greece was suppose to play a role of boosting the Western European aspirations, but in the current scenario the crisis seems to dampen Greece’s this capacity to play this role and damage the prospects for European Union integration in the nearby regions. According to the reports published by the British press the decision to whether help out Greece would be taken on a majority vote among the European Union nations. Even Britain that had always been unwilling to join the Euro Zone might have to shell out 7 billion pounds and more to bail out Greece in order to save the currency. (Belien, January 2010) If the European Union decides a rescue fund equal in amount to the debt deficits of Greek nation, and further decides that the member nations have to pay in accordance to their share in Euro zone economy, excusing the bankrupt economies like Spain from the exercise would drain out huge sums from Britain. The results of public opinion polls in European nations are also against the complete bail out of Greece. The Euro Zone’s founding treaty had never set out any rules on how a struggling member nation would be helped by the other members. There are also indications that to help itself out the Greek government might drop out Euro as its currency and re-establish its own national currency Drachma, so that it can devalue the currency on its own will to stimulate export and economic growth. If this occurs other countries like Athens, which is also in a disadvantageous position if it sticks to euro, would follow the same path. “There is every prospect that within two to three years...Greece’s European membership will end with a bang.” (Belien, 2010) Warned IMF forecaster Desmond Lachman. The other option that Greece has if the deal fails is to adopt a dual currency measure so as to meet its external commitments using Euro and the internal ones through IOU, suggests Goodhart, the internal currency can be fluctuated according to Euro, but this arrangement would be very messy he further adds. Euro is not only an International currency but also is vested with a lot of political consequences, so there would be no permission for this currency to be dropped by its member nations. The economic and monetary issues would not be the only deciding factor but the political factors also would be involved in the decision-making. “There is so much political capital invested in the euro by the political class,” wrote Irwin Stelzer, in the The Wall Street Journal “that even the stern and parsimonious [German Chancellor] Angela Merkel will in the end contribute to a bailout fund if necessary.” (Belien, 2010) The Euro zone would require a lot more integration to survive this test. If the financing plans of Greece’s debts fail and if Greece is allowed to default then it would be disastrous for the country as well as for the survival of euro. Further if the bailout is carried out it would be solving the problems of Greece only temporarily, say for a year or two, as they do not give solutions to the other root problems of Greece’s economy, other than the reducing the budget deficits. The Greek economy being very uncompetitive may cut the deficits fast and hence would be caught up with the problems of deflation. (O’Donnell & Catherwood, May 2010). Few experts have a different opinion on this issue they still believe that euro would easily sail through this crisis as this is the first major crisis faced by the Euro region, moreover Greece is only a small member of this Union. If strong measures are adopted along with making Greece available with the deficit amounts it would possible to bail out Greece from this crisis and stop the ripples from spreading to other euro nations, suggests Paul Volcker, former chairman of Federal Reserve. (Buergin & Encz, March 8, 2010). Concluding Remarks: The French President Nicolas Sarkozy was heard commenting that the Euro Zone members must help to bail out Greece or take the risk of destroying the Euro. (Buergin & Encz, March 6, 2010). The deficit in Greece swelled up to 12.7 percent, which is almost four times above the European Union’s cap of 3 percent. Greece has promised to reduce the budget deficits to 8.7 percent, by freezing pension payouts and other major severity measures. (Reuters, n.d.) Greece needs massive reconstruction to pay off its debts and is on the verge of collapse. The severe austerity measures can easily push the economy into a deeper recession. Meanwhile it has attracted mass social unrest among the citizens. The European Union is under a serious dilemma over the situation of Greece and to make the matters worse Portugal, Spain, Ireland and Italy seem to in queue in requirement of major overhauls. (Moser, April 2010). Some investors are of the view that even if Greece is pulled out of the crisis the future of the euro currency is still bleak as the European economy faces bigger problems, billionaire investor George Soros comments that a temporary arrangement could bail out Greece from this crisis but it leaves the other countries of Euro zone like Spain, Portugal, Italy to risk. The bailout arrangements made by the euro zone nations and other countries would make an make shift arrangement for Greece to survive out of the crisis, but all the other countries mentioned above from the euro zone constitute of a too large portion of the euro zone to be bailed out by this method. “The crisis in Greece is a forerunner of a whole rash of similar crises set to soon break out across Europe,” editor in chief Gerald Flurry wrote in the February 2009 Trumpet (Fraser & Morley, April 2010). Some analysts conclude that Euro was destined as well as designed to fail from the beginning. After the implementation of this single currency system there were prophecies about the failure of the euro. It was theorized that founders of the Euro zone were virtually aware that it is impossible to achieve a united continent and for countries like Greece, a future debt crisis was inevitable. Meanwhile there is no doubt on the fact that the viability of the European Union is threatened by the massive debt problems in Greece, and given a mighty blow to the strong foundation of the European Union. References 1. Hopkins,K. (february 2010), Q&A: Greece's financial crisis,guardian.co.uk, available at:http://www.guardian.co.uk/business/2010/feb/10/greece-financial-crisis-strike (accessed on May 15,2010) 2. Streich,M (March 2010), The Greek debt bubble, suite101.com, available at: http://greece.suite101.com/article.cfm/the-greek-debt-bubble (accessed on May 15,2010) 3. Vucheva,E. 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