Substantial Economic Risks from the Eurozone Crisis - Assignment Example

Name Institution Tutor Date Introduction The Eurozone crisis is still an impending challenge for the European economic block. This is due to the fact that recovery from the previous global economic crisis has been very gradual. In addition, no substantial economic growth has been recorded in the initial quarter of the year 2012 (Hewitt, 2012, p1). Many export oriented countries depend on the Eurozone market as a major global market segment. Nevertheless, with the existing crisis in the region, export oriented countries may or may not counter various substantial economic risks as they continue to export their products to the region. This particular paper seeks to evaluate whether export oriented countries such as Singapore face substantial economic risks from the Eurozone crisis. In addition the paper will evaluate whether governments should play an active role in managing an inflationary economy. Question 1 It can be argued that export oriented counties such as Singapore face substantial economic risks from the Eurozone crisis. One of the basic reasons is that Singapore is bound to experience a decrease in earnings from foreign exports. Kamar (p2) highlights that the Eurozone crisis has resulted to a decline in the exchange of the Euro against the dollar. Kamar (p2) further reveals that since January 2010, the exchange rate of the euro against the dollar has reduced from 1.45 to 1.19 which is a reduction of 18%. The basic implication of the depreciation of the Euro is that there will definitely be a potential drop in terms of demand for exports by the Eurozone economies. This may therefore force export oriented countries such as Singapore to lower the prices of there products if they want to capture the European market effectively. As indicated in the graph 1.0 a decrease in demand is bound to shift the demand curve to the left side. In addition the equilibrium price will fall and also the quantity demanded. As highlighted by the graph, in order for Singapore to effectively capture the Eurozone demand there is need for the lowering prices of exports products to the Eurozone market. This will therefore result to a decline in export earnings. Graph 1.0 Another reason to back the fact that export oriented counties such as Singapore can face substantial economic risks from the Eurozone crisis is because by exporting their products to the Eurozone regions they may encounter the balance of payment deficient. The balance of payment deficit usually occurs when a country is importing more than its exports. In a scenario whereby Singapore is conducting trade with European nations, the country may experience a situation whereby imports more from the European nations as opposed to the quantity of products that she exports to the Eurozone regions. This is because as Brittain and Hannon (p11) disclose, most European countries at this particular point are experiencing a serious decline in terms of exports. A recent finding by Eurostat / European Union's statistics agency revealed that between the month of October to September 2012, the Eurozone exports declined by 1.4% while imports rose by 0.6% (Brittain & Hannon , p11). Based on such findings what is evident is that export oriented countries that are trading with Eurozone countries will in the long run experience a balance of payment deficient as long as the crisis still persist. This is because in order to cut back on spending EU countries will export less and import more in order to enhance economic growth. Singapore as an export oriented country is also likely to face a substantial economic risk of depreciation of the Singapore currency against the dollar. According to Massa et al (p8) a reduction of commodity prices may influence the depreciation of the local currency of a particular region. When Singapore continues to export it products to the EU and yet commodity prices have reduced due to a decrease in the demand for exports, what is evident is that Singapore’s currency against the dollar may also greatly depreciate. Singapore is also likely to experience the problem of inflation. Based on the fact that demand of the Eurozone export market has greatly declined, the country will then largely depend on the demand within the domestic market which is basically higher than that of the export market. Inflation my occur in the sense that the prices of goods in the country will rise due to increased demand , but the value of the countries currency will still be the same. On the other hand it can be argued that export-oriented countries such as Singapore may not face substantial economic risks from the Eurozone crisis. This is basically because many export oriented countries such as Singapore have been very resilient when it comes to dealing with the financial crisis. Das (p5) highlights that in despite of the existing Eurozone crisis export oriented countries appear to be making a shift towards suitable growth on domestic demand as opposed to exports. Consequently, the use of such an approach may assist countries such as Singapore to evade the economic implications of Eurozone crisis. Question 2 I do agree with the statement that it is essential that governments should play an active role in managing an inflationary economy. Inflation is the increase in the prices of services and good over a certain period of time. At this particular time the currency unit can only buy only a few services and products. In addition the purchasing power of the currency is lost within the economy and even within the international market (Currie, p35). One of the basic reasons why governments should take an active role in managing an inflationary economy is because it is the government that has the power to influence economic polices within a country which can further result to resolving the challenge of an inflationary economy. Ironwood Publications, (2012, p113) highlight that the government has the power to develop a Fiscal policy that is able to lower inflation levels. This can be undertaken through approaches such as reduced government spending and the increasing of taxes. For instance Currie (p36) reveals that higher tax can assist in lowering inflation rates in country this is because it facilitates a reduction of public spending thus lowering inflation levels. During the period of inflation, the income of the rich rises rapidly. The government can reduce their income by imposing additional direct taxes or even by raising the existing taxes. According to Ironwood Publications (p113) the Fiscal Policy such as tax reduction, has the capability of reducing the level of inflation nevertheless; it is usually difficult to get the Congress and the President to support the Fiscal policy that involves an increase in taxes and the reduction of government spending. The government should also play an active role in managing an inflationary economy. This is because by developing a monitory policy it is possible to sustain a low inflation within the economy. The role of the government is to provide a given inflation target. Romer and David (p287) highlight that after providing the target, the central bank then utilizes interest rates in order to attain the targets that are set by the government. The initial step of implementing the monitory policy is by conducting a forecast of the future inflation, this is done by evaluating the existing economic statistics in order to identify if the economy is overheating. In case the inflation is predicted to rise above the target that was set by the government, then the central bank will raise interest rates. Romer and David (p312) assert that increased interest rates will result to lowering an economies’ Aggregate Demand. The implication of the slower growth is that it will result to a lower level of inflation. This is because when interest rates are high, consumer spending is reduced. This arises because high interest rates are bound to discourage consumers from spending and borrowing, and thus managing inflation rates. Apart form the use of polices, the government can also take an active role in managing an inflationary society through increasing the level of production in the country. Currie (p35) highlights that inflation affects production through changing investment and the profitability of business alternatives. This is because due to changes in prices, investors and even business men are forced lower their level of supply due to high production costs. A powerful method of managing inflation is through increasing the level of output. The government can encourage an increase in production through methods like importing raw material in order to try and increase production. In addition the government can also raise working hours which will also encourage an increase in the level of production. The government also has the capability of making decisions concerning the valuation of the currency. Consequently, the government should paly an active role in managing an inflationary economy through the approach of over valuation of the currency. Currie (p36) highlights that if a countries currency is overvalued, that is by being valued more than it deserves, then it becomes possible to control rising prices. This is due to the fact that the approach will lower exports and increase domestic supply. In addition imports will be encouraged and thus increasing the level of domestic supply. The government should also play an active role in the management of public debt. In order to effectively manage an inflationary economy, the government has the capability of managing old public debts. This can be undertaken by placing additional purchasing power at the disposal of banks and people. This can be implemented through repaying bank loans and surplus budgeting. In addition the government can also issue non discounting bonds. It is however essential that the government should adopt such approached with caution (Currie, p36) Conclusion The discussion above has presented the fact that the Eurozone crisis can actually bring about economic implications to export oriented countries. This include problems such as decrease in earnings from foreign exports, inflation , balance of payment deficient, and the depreciation of the countries currency. In conclusion, the paper proposes that the government should take an active role in managing an inflammatory economy. Works Cited Brittain Alex and Hannon, Paul. Euro-Zone Exports Fall. Wall Street Journal. 2012,p11 Currie , David. Macro Economic Analysis. Nirali Prakashan.2011, p35-36. Das, Dilip. The Eurozone Financial Crisis and the Resilience of Asia’s Economy. Institute of Asian Business.2012, p5. Kamar, Pravind. Facing the Euro Zone Crisis and restructuring for Long term Resilience. 2010, p2 Hewitt, G. Europe editor Eurozone falls back into recession. BBC News. .2012. Massa, Isabella, Kaene , Jodie and Kennan, Jane. The Eurozone crisis and developing countries. Oversee development Institute. 2012, p8-10. Ironwood Publications. 2012 , Retrieved From< http://www.ironwoodpublications.com/files/49812891.pdf> Romer , Christina and David H. Reducing Inflation: Motivation and Strategy. University of Chicago Press. 1997,p287-312. Read More