Ongoing Financial Crisis and the Prospect of Euro - Essay Example

Ongoing Financial Crisis and the Prospect of Euro This research paper is focused on the causes and impacts of ongoing financial crisis. Fiscal policies of the modern governments are currently focused on dealing with ongoing financial crisis. Moreover, there is a direct relation between exchange rate and stabilization of the country. It is appropriate to take relevant measures and apply exchange rate models to develop stabilization policies in the countries, which are exposed to financial crisis and sub national currency depreciation. Key words: currency, financial crisis, exchange rate, stabilization. Ongoing Financial Crisis and the Prospect of Euro Ongoing financial crisis is still turbulent for the modern society. It should be noted that both micro- and macro-economic factors should be taken into account in order to discuss potential future impacts of ongoing financial crisis. Currently, America is challenged by “rising debt-to-GDP ratio” (Bennett, 2012). There is a horrific national debt in America and it is relevant to take appropriate measures in order to deal with drastic consequences of the financial crisis in the country. Moreover, America and Europe are struggling for having an opportunity of needed growth and job creation. America has entered its decade of loss. The same prognosis is appropriate for Europe. The levels of industry decreased in Europe and there is no more hope in the countries of this continent. Even in Germany, which has always been one of the leading economies of Europe, this type of decline is evident. In accordance with Lendman (2012), a brief overview of the economies of the leading countries of Europe is as follows: “Q IV growth appears down 1% on an annualized basis, and number two economy France is headed south. UK production dropped 0.6% in November following a 1% plunge in October. Year-over-year, Britain’s down -3.1%” (Lendman, 2012). There are also evident drawbacks in the economies of other countries, such as Portugal, Italy, Ireland, Greece and Spain. The countries of Eurozone indicate that their peak in 2010 is outnumbered by indices from other countries, such as Asia and China. Gerald Celente concluded that: “Given the current economic and geopolitical conditions, the central banks and world governments already have plans in place to declare” it “with the possibility of military martial law to follow” (Lendman, 2012). The countries are on the verge of their economic collapse. It is possible to summarize that some of the countries would benefit a lot, but the rest of the countries would remain with nothing. There is a need for social changes and the Europeans are looking forward to finding some perspectives to solve their problems and care less about a potential “hyperinflationary “Weimar episode” because of abundance of money and credit (Lendman, 2012). The loans from the government support banks in the US and UK in spite of the fact that banks in these countries are devastated. Nevertheless, the American government has exceeded its limit of loans and nowadays the bankers of the world are waiting for a greater financial crisis coming. Financial risk is incredibly growing because the central banks and the governments of different countries are interfering in markets and create a favorable basis for possible distortions. Moreover, these coming hardships are intolerant to accept (Bullard, Neely & Wheelock, 2009). The main concern is to appeal for the society and common people in order to make them fight for their own rights. Fiscal and monetary policies Fiscal policies of the countries are closely related to the issue of sustainability. Fiscal sustainability of the country occurs when: “the present-value budget constraint—in which the current debt is less than or equal to the discounted value of future primary surpluses—is satisfied at all times” (Balancing Fiscal Policy Risks, 2012, p. 16). Practically, country’s policies focused on maintenance of a stable debt ratio in the average term are known as sustainable ones. On the basis of numerous researches and studies, fiscal sustainability of the country has always been of crucial importance the macroeconomic view. The size of fiscal gaps is of crucial importance nowadays, when the countries of the world are surviving ongoing financial crisis. There is a need for balancing between the public and the private sectors and feedback of the fiscal policy at different levels. From another perspective, fiscal policy of the county is sustainable if: “both debt and primary deficit variables are stationary” (Balancing Fiscal Policy Risks, 2012, p. 16). There are also many other approaches to fiscal sustainability definition, but the main drawback is that current data should be taken into account and not past-value data. It is possible to consider fiscal policy in dynamics and allow a certain degree of change. Currently, both fiscal and monetary policies are developed on the basis of different theoretical developments of past and present years. For example, the IMF distinguishes between policy responses to nationwide and asymmetric shocks. Fiscal variables of the sub national governments are mainly adjusted on the basis of the regression-based methodology. The Hodrick-Prescott filter presents the cyclicality of regional fiscal policy and it determines that there is “a positive (negative) slope coefficient indicating procyclical movement of expenditure (revenue) variables” (Balancing Fiscal Policy Risks, 2012, p. 62). Thus, fiscal stabilization of the countries should be currently correlated with monetary and exchange rate policies. Moreover, some challenges may occur at sub national levels, when sub national governments could hope for a final bailout by the central governments (Bloom & Schirm, 2010). Fiscal and monetary policies are better regulated by the central governments, because they are able to give a countercyclical response. From another point of view, sub national governments have their own benefits as well, because they know local communities’ preferences concerning public services exchange rate model. Other exchange-rate movements can be triggered by the size of FX reserves, which are considered as a part of GDP share. Therefore, the higher rates of FX are, the lower the depreciation of currencies. Respectively, domestic currency can be under a great pressure during the periods of financial crisis. The countries are at risk because their domestic currencies depend on US dollar liquidity demands. Recent changes in exchange rate Starting from December 2011, the Euro experiences a serious downfall. Brazil’s real was dominant over dollar because of central bank’s signing currency contracts. There is also an evident decline of the Australian and New Zealand dollars. Thus, these tendencies are factors witnessing uncertainty and increase of poverty in the world. The Euro cannot find its highest position in the world and it is relevant for the international society to take those features into account as well. Current downfall of the euro for 2.1 percent to $1.2517 is close to its low rate of 2010 that was $1.2496 (Lendman, 2012). Unfortunately, the European leaders take no appropriate measures to deal with this critical downfall of the euro. The governments of different countries ask for help, but the EU can hardly correct the coming difficulties in Spain and Greece. Therefore, it is relevant to take into account internal changes in the European countries in order to understand the euro downfall. Thus, China can provide the European countries with the opportunities of opening new homes for export. Moreover, in order to deal with uncertainty in the European countries, it is very important to refer to possible prospects of unemployment levels decrease and opening new markets for manufactured production exporting. As far as we can see, there is direct connection between changes in exchange rate recently and ongoing financial crisis. Stabilization policies and exchange rate It is possible to regulate exchange rate stability by implementing a “Currency Band” to restrict the exchange rate fluctuation. For example, there is an option to intervene in the market of foreign currency of an alternative supplier and take control over capital inflow and outflow. Nevertheless, credibility of a chosen macroeconomic policy depends on the ability and openness of the private sector to accept suggested policies. It is possible to assume that in case a sub national currency is opposed to the exchange rate of the euro, the investors may be in panic. An alternative currency band system occurs when there is an option for the exchange rate to move freely in the frames of the assigned “band.”  The important role is played by the private sector and the role of the government is diminished at once. An appropriate measure in terms of a “currency band” policy is a capital control measure. It is focused on the assurance of investors in the credibility of currency. Therefore, it is appropriate to regulate exchange rates of currency in terms of the currency band system, because it is focused on stabilization of the private sector, which suffers most of all in case of exchange rate fluctuations. Exchange rate model Under current conditions it is possible to take into account the scapegoat theory of exchange rates. This model clarifies that some influential macroeconomic factors exert a great influence on the movements of exchange rates. This theory was developed by Bacchetta and van Wincoop (2004, 2006, 2009, 2011). Their works are focused on forward looking role of exchange rate. In other words: “the uncertainty of structural parameters attached to fundamentals, combined with the role of unobserved fundamentals: put simply, agents do not know the coefficients of the model and do not observe one of the fundamentals” (Fratzscher & Sarno). It is relevant to consider this model based on constant parameters and on time-varying parameters. The latter parameters are useful for the explanation of exchange rate movements, underlining an improved performance in comparison with benchmark models. The simple scapegoat model with constant parameters is applicable for the economies of the industrialized countries and some emerging markets. On the basis of this model, it is evident that changes in the fundamental and even unobservable factors reflect large shocks and are consistent with the movement of exchange rate. Therefore, this model reflects changes of exchange rates, which are consistent with the expectations of structural parameters and unobservable factors. This model is applicable in the modern context while the main players among the European countries such as Germany and the UK are losing in their major spheres of interest because of lack of new markets and high levels of unemployment. Conclusion A great number of unemployment and a high level of misery are predicted by numerous researchers and scientists. Therefore, current mishaps of the European countries are often referred to their badly considered policies, but there is no doubt that better economies have a lot of opportunities to unite with less successful economies. Today the economies of the European countries and America are fragile. From this perspective, the Euro is on the way of collapsing. Actually, the process of the Euro disintegration has been lasted for years and nowadays both economically and financially it may be exposed to dislocation. Unfortunately, this impact will be the heaviest for common people while the banks are able to earn trillions of taxes. References Balancing Fiscal Policy Risks. (2012, April). World Economic and Financial Surveys. International Monetary Fund. Fiscal Monitor, pp. 1-96. Retrieved from http://www.imf.org/external/pubs/ft/fm/2012/01/pdf/fm1201.pdf Bennett, Allison. Euro Declines Most In 2012 On Deepening Turmoil In Spain. (2012, May 26). Retrieved from http://www.bloomberg.com/news/2012-05-26/euro-declines-most-in-2012-on-deepening-turmoil-in-spain-greece.html Bloom, R., & Schirm, D. (2010, February). The Report of the Financial Crisis Advisory Group. The CPA Journal, 80, 36+. Bullard, J., Neely, C. J., & Wheelock, D. C. (2009). Systemic Risk and the Financial Crisis: a Primer. Review - Federal Reserve Bank of St. Louis, 91(5), 403+. Currency Band: An alternative to exchange rate stabilization policy. Retrieved from http://blog.nationmultimedia.com/print.php?id=3361 Fratzscher, M., & Sarno, L. The Scapegoat Theory of Exchange Rates: The First Tests. Working Paper Series, No 1418, February 2012. Retrieved from http://www.ecb.int/pub/pdf/scpwps/ecbwp1418.pdf Lendman, S. (2012, January 13). Ongoing Global Economic Crisis. The Intel Hub. Retrieved from http://theintelhub.com/2012/01/13/ongoing-global-economic-crisis/ Read More