Germany, Norway and the Euro Zone Crisis - Case Study Example

Compare And Contrast How Two neighbouring EU Countries, One Based within the Euro Zone, One Based outside the Euro Zone Have Fared during the Euro Crisis and How They Have Dealt with It Table of Contents Table of Contents 2 Thesis Statement 3 Introduction 3 Causes of Euro-zone Crisis 4 Germany and the Euro Zone Crisis 6 Norway and the Euro Zone Crisis 8 Conclusion 10 References 11 Thesis Statement In retrospect, the euro-zone crisis has been an important factor for influencing the economic performance of European member states owing to increased government debt. In addition, the euro-zone crisis is identified to be affecting other countries to a minimum or large extent depending on their association with European member states. In this regard, the research paper focuses on the consequences of Euro Zone crisis on Germany and Norway and the measures taken to deal with it the same. Introduction The Euro-zone crisis is a debt crisis, which struck the Euro-zone member states in the year 2009. The global financial crisis, which took place during the year 2008-2009, had its origin from the financial industries of the US. However, this global financial crisis reached the economy of the EU member states in the year 2009, which resulted to the great recession recognised as Euro-zone crisis. Most of the EU states are still facing the effects of euro-zone crisis and have not recovered fully from the economic downturn (Ofi Press, 2012). However, as a result of the euro-zone crisis, the economy of Germany also suffered a lot, but there are many economists who are of the opinion that the economy of Germany developed as a result of the euro-zone crisis. Germany entered the euro-zone in order to strengthen the integration with the European countries as well as the overall economy of Europe, so that it can compete with the US. Germany is also held responsible for the debt crisis that was faced by the EU countries (Social Europe Journal, 2012). Moreover, as a non-European, the Norwegian economy was negatively affected by the euro-zone crisis. Even though, Norway is not a member state of the EU, but it allows free access to the citizens of the member states. However, during the debt crisis, the people from all the member states migrated to the country, which negatively affected the infrastructure of Norway as well as led to unemployment. The European monetary Union has been responsible for the growth of the debt crisis among the member states and has highly affected the financial sectors. However, the banks of the EU are suffering from huge debts and even they do not have any proper solution and planning regarding the way of settling these debts. Thus, not being a member state, the effect of euro-zone crisis on Norway is much different from that of Germany, which is an active member of the EU (E!Sharp, 2014). Causes of Euro-zone Crisis The euro-zone crisis started during the second half of 2009, which appeared to be a great threat to the euro-zone countries in 2010 in the form of great recession. There are certain combining factors that are responsible for the debt crisis. The first factor is the violation to the rules of the EU. European Monetary Union was established in the year 1999, which introduced Euro system for the member states. There were certain rules and regulations as stated by the EU, which were necessary to be followed by all the member states (ICN.COM, 2012). However, there were some countries like Greece and Cyprus, who violated the rules by not providing actual data regarding the economic and financial conditions of the same. The EU was aware of this fact, but ignored the matter and accepted the two countries in the member list in order to strengthen the EU. Moreover, the EU accepted high budget deficits during the crisis from many countries. The next factor is the problems related to the banking sectors. There were certain financial instruments used by the European banks that include Collateralized Debt Obligations (CDOs) and Credit Default Swaps that were of high risk. These financial instruments had weakened the banks, because they were focused on financing the budget deficits of the government rather than lending money to the public and the business. The third factor is the wrong rating by credit rating agencies that led to the euro-zone crisis. The credit rating agencies are generally responsible for rating the government bonds according to their priority and accordingly, have a high influence on the government bonds. If the rating agencies lower the rating ratio, then the investors become more cautious and the government shows their unwillingness in lending, which resulted in the rise in rate of interest for the government bonds. However, before the euro-zone crisis, none of the credit rating agencies of the EU countries identified the national deficits and foreign debts. Thus, the inefficiency of the credit rating agencies was considered as a major cause for the euro-zone crisis. The next factor responsible for the debt crisis is the political conflict. Politics and economy of any country are highly interrelated to each other. The difference in the opinion of various political parties in Europe created a conflict in taking important decisions for the EU. Germany and other wealthy nations of the have not planned to include taxes on products and/or services for the crisis nor use violence, while the peripheral nations on the other side planned to develop flexibility in order to revive from the crisis. Despite of these differences in opinion, Germany stuck to a single decision of adopting the policy of austerity, i.e. reducing the budget deficits in order to deal with the debt crisis. However, the government refused to increase the tax or spending cuts and expressed their anger in the form of strikes and punishing votes to the anti-austerity parties. Additionally, indecisive actions taken by the European government officials were identified to be responsible for the euro-zone crisis. The euro-zone crisis, which originated in Greece was not only confined to the country, but also transferred to other countries due to the slow response from the European government officials and their indecisive actions. Thus, all these factors were considered as the potential causes of the euro-zone crisis, which negatively hampered the economy of the EU member states as well as the economy of other countries that are related to it (Neurope.Eu, 2014; Social Europe Journal, 2012). Germany and the Euro Zone Crisis Germany is one of active member states of the EU that has helped in strengthening the overall European economy. The debt crisis is recognised to have its origination from Greece during the correction of its financial budget figures in the year 2009. By the year 2010, a drastic change could be witnessed in the structure of the interest rates within the European Monetary Union. The recession already hit all the member states of the EU except Germany. The German economy was stable at that time and the people from other member states started migrating to Germany and invested in German economy. They considered Germany to be the safe heavens and up to the middle of 2011, the economy of Germany was still at peak. However, during the last half of the year 2011, the German economy started declining gradually and this was the advent of the recession in Germany. The German economy has been affected by the euro-zone crisis in various ways. As a result of the debt crisis, the export sector of Germany has been affectedly badly. The value of euro has also reduced by fifteen per cent, which made the German exporters to show their competitiveness in the international market in terms of price. Moreover, the debt crisis has increased the burden of interest on Germany (Broyer & et. al., 2012). The German economy has benefited in several ways as a result of the euro-zone crisis. In order to support this statement, the focus has been provided on three aspects that include booming housing market, migration of skilled labours from the neighbouring countries and low rate of interest. As a result of the booming housing market, the construction of buildings has increased considerably in Germany, which has highly affected the labour market of Germany. During the year 2011-2012, the number of employees in the construction sector has increased by 11,000 compared to 2013. The next aspect is the migration of skilled labours from the neighbouring countries in large number. During the year 2011-2012, the number of people immigrating to Germany from Greece, Portugal, Italy and Spain has increased to 45%, which refers to about four thousand immigrants from Portugal, nine thousand from Spain, ten thousand from Greece and twelve thousand immigrants from Italy. In addition, the low rate of interest is regarded as a fragile advantage because the Central Bank of the EU has to increase the interest rates in future. This has led to the rise in the interest payments by the government, which has negatively affected the value of Euro (Institute for New Economic Thinking, 2009). Apart from these advantages, there are also some disadvantages of the euro-zone crisis on Germany. The export sector of Germany was negatively affected as a result of the crisis. Due to the economic downturn of the countries of Southern Europe, their economic condition restricted them in conducting their import activities, as a result of which the export from Germany to those countries also reduced. It has been also identified that the total number of exports to the European member countries reduced by 9.6 per cent in the year 2013 in comparison to 2012, which has been regarded as the highest downturn in the export sector of Germany since 2009 (Dow Jones & Company, Inc, 2014). As Germany is mainly dependent on exports, the reduction of exports has directly and indirectly affected the economic development of the country. The German economy is directly affected in the manner that due to lower imports in the countries that include Spain, Italy, Greece and Portugal, the total exports of Germany also lower, which ultimately reduces the employment opportunities in the export-oriented companies of Germany. However, the German economy is affected indirectly in the sense that due to the lower imports in these four countries, the member states of the euro-zone also lower the number of exports to these countries, which resulted in lower GDP, less income and less employment. Thus, the exports to these countries by Germany were also reduced (VoxEU.org, 2014). Norway and the Euro Zone Crisis As a result of the euro-zone crisis, the Norwegian economy was also negatively affected. Even though Norway is not a part of the EU, but the country allows a free access to the citizens of the European member states to enter the country. However, during the euro-zone crisis, the people of the EU member states migrated to Norway to invest in the economy and search for employment opportunities. As a result of the huge inflow of people from other countries, the economic infrastructure of Norway was badly affected and the employment opportunities of the local residents were at stake. Moreover, being a sovereign country, it took more time for the economy of Norway to recover from the debt crisis, as Norway is not a member state of the EU and thus, it did not have any support from them (Scan Magazine, 2014). However, among other sovereign countries, Norway was able to recover from the financial crisis faster. The GDP growth of Norway was negatively affected during the last quarter of 2008 and first quarter of 2009. However, the GDP started growing during the second quarter of 2009 and the rate of unemployment started reducing gradually. The debt crisis also affected the financial institutions and banks of Norway, but the loss suffered by them was moderate. In this respect, the GDP of Norway has been identified to be growing gradually and the rate of unemployment has reduced to about 3.3 per cent. The quick recovery and economic development of the Norwegian economy has been possible only because of the long term effective economic policy adopted by the Norwegian economy. Norway is a petroleum producing country and the revenues generated from petroleum resources are kept aside as a fund i.e. Pension Fund, which is utilized in investing in the financial assets outside the country. In this regard, the expected real return generated from the investments are utilised for economic activities. Thus, the policy framework has helped in stabilizing the Norwegian economy more quickly and effectively (Esbat, 2001). However, certain measures have been taken by the Norwegian authority in order to recover from the global debt crisis. The Central Bank of Norway has reduced the policy rate to 1.25 per cent, which is about 4.5 per cent less than that of the previous rate. This strategy has a positive influence on the household demand due to the floating rate of interest that is applicable to the Norwegian mortgages. A fiscal policy has been adopted by the Norwegian government that focuses on the revenues obtained from the petroleum resources. The petroleum revenue of Norway is estimate to be about NOK 130 billion, which contributes to about 3 per cent of the GDP for the Norway Mainland. Moreover, the government and the Central Bank of Norway undertook various measures in order to stabilize the financial markets of Norway. By utilizing these measures, the financial institutions of Norway were provided with the facility to have easy access to cash and long term funding has strengthened the overall infrastructure of the banks to perform their day-to-day lending activities. Thus, the revenues from petroleum resources have helped to stabilize the economy of Mainland Norway. Due to the increase in activities in the continental shelf, a high demand is created in the Mainland Norway for capital as well as intermediate goods from the manufacturers. Moreover, the public sectors of Norway have helped in stabilizing the economy. More than one third of the labour force is employed by the public sector. However, jobs of the public sector were not at all affected by the euro-zone crisis and the various facilities that are provided to the public sector employees included pension, education and health care facilities among others were not affected by any disturbance in the economy or the market (The Real Truth, 2014; Bloomberg L.P, 2014). Conclusion Thus, from the above discussion, it can be concluded that the euro-zone crisis has negatively affected the economy of all the member states of EU as well as the economy of other countries. Germany was one of the EU member states where the financial crisis struck lately, but the economy was hampered as a result of the recession. Various factors that were responsible for the euro-zone crisis included violation of the rules of the EU, problems in the banking sector, inefficiency of the rating agencies, political conflict and indecisive actions from the government. However, Germany is considered to have been benefited from the euro-zone crisis in many ways. There has been a huge inflow of the skilled workers to Germany from different countries of the world and EU member states, which helped in the economic development of the country. Moreover, low rate of interest helped Germany to develop financially. Similarly, a non-European nation i.e. Norway has been also identified to suffer from the harmful impacts of the global financial crisis. Even though Norway is not a part of the EU member states, it allows free access to the citizens of the European member countries, which resulted to the decrease in employment opportunities for the native people of Norway. In this regard, the authority of Norway had taken various measures that include reduction of policy rate and development of fiscal policy with the aim of recovering from financial crisis. References Bloomberg L.P, 2014. Norway Keeps Main Rate Unchanged as Euro Crisis Deepens. Article. [Online] Available at: http://www.bloomberg.com/news/2012-06-20/norway-keeps-main-rate-unchanged-as-euro-crisis-deepens-1-.html [Accessed December 13, 2014]. Broyer, C. & et. al., 2012. Impact of the Euro Crisis on the German Economy. Economic Research & Corporate Development, No. 154, pp.1-11. Dow Jones & Company, Inc, 2014. Euro Crisis Damps German Growth. Article. 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The Real Truth, 2014. In the Midst of a Global Crisis. Norway. [Online] Available at: http://realtruth.org/articles/090605-006-profile.html [Accessed December 13, 2014]. VoxEU.org, 2014. The Euro Crisis: Muddling Through, or on the Way to a More Perfect Euro Union? Article. [Online] Available at: http://www.voxeu.org/article/germany-and-future-euro [Accessed December 13, 2014]. Read More