Th Impact of the Euro Crisis on the World - Essay Example

TITLE: СОMРRЕHЕNSIVЕ АNАLYSIS REPORT ОN THЕ IMРАСT ОF THЕ ЕURО СRISIS Name Institution Introduction The Euro Crisis has sparked mixed reactions globally given the impact it has had on the economies of most states. Although the epicenter of the crisis is Europe, the rest of the world has been influenced socially, politically and economically with far reaching consequences. This research seeks to draw a comprehensive analysis of the implications that the Euro Crisis has had in Europe, Australia and the world. Secondly, focus will be directed to Spain, one of the major countries in the Euro zone, whereby it will be analyzed in terms of its specific economic, political, cultural and social characteristics along with its history. Furthermore, possible implications and contingency planning will be highlighted regarding Australian businesses. Finally, a case study of Leighton Holdings, an Australian business operating in Spain will be explored in relation to the Euro Crisis. Impact of Euro Crisis in EU January 1 1999 marked the establishment of the European Monetary Union (EMU) which was then tasked to denominate the currencies of the European Union members into a single currency. However, Denmark, Sweden and the United Kingdom declined to join the union. It later emerged that the constituents of the union were moving at different speeds with varying fiscal capacities and profiles but they were operating with one currency. Furthermore, the main reason underlying the formation of the monetary unions was political as it was viewed as a symbol of political and social integration (Dash, R. , 2012). In order to maintain the credibility and the stability of the Euro, the European Union endeavored to maintain the prices constant. However, the countries were hit with varying levels of inflation making price regulation impossible. The member countries never stayed within the norms laid by the European Monetary Union hence led to the failure of the monetary integration. Failure to establish a fiscal union therefore led to the to the increased fiscal deficit and public debt which was as a result of weakness in the fiscal system that was hidden by the initial faster growth in the economies of the particular countries in the Euro zone namely Greece, Ireland, Germany, Greece, Spain, Italy etc. The global financial crisis of in 2007-08 led to a sharp growth decline in Europe. This led to a move by the European Monetary Union to guarantee interbank lending in to prevent the actions of one country affecting the other negatively. One event led to the other and in 2009, Greece admitted that it had been significantly hit by fiscal deficit and public debt. This led to a move by the European Commission to guarantee for loans to affected countries from the European stabilization mechanisms (Shapiro, 2011). Greece was later bailed out of 109 billion Euros, a fact that marked a turning point for the Euro crisis. Other countries felled victims of the euro trap with Spain, Ireland, Portugal and Italy going through immense challenges of fiscal deficits and public debts which led to significant decline in growth. As a result of the Euro crisis, various effects were experienced by the particular countries ranging from austerity measures taken by the affected countries with the objective of reducing public debt and minimizing fiscal deficits. Greece, Spain and Portugal in particular had to cut down on public spending which led to unemployment and straining of businesses. European investors had to liquidate their assets in foreign countries in hence affecting economic growth. The Euro crisis also led to political difficulties as there was stiff opposition to the prolonged austerity in Greece. The value of the Euro consequently declined and the confidence on the dollar deteriorated. Moreover, investor confidence in Europe dwindled with many businesses recording significant losses. The increase in interest rates by banks and the reduced public spending by governments resulted to decreased aggregate demand for goods and services in Europe leading to losses by businesses. Most of the businesses dealing in importing goods incurred more costs as a result of devalued euro which meant more Euros were required. Effects of Euro Crisis in Australia Although Australia is geographically far away from Europe, it has had its share of effects relating to the Euro crisis. Australia has had to see European investors withdraw from its market as a way of deleveraging. Many European banks have left Australia for their home countries (Uren 2011). The rising unemployment levels in Europe have also made Australia to host young and well qualified professionals from Europe who go to Australia to seek employment. Australia therefore benefits from the quality labor offered by the young dexterous Europeans. The Australian citizens also have found investing opportunities as a result of sale of assets by European financial institutions that were initially owning assets in Australia. Australia has also contributed to the bailout package for European countries hence experiencing the financial hitch experienced by the European countries. Moreover, Australia has had the opportunity to learn from the experience of Europe before it gets ambushed by the very conditions that bombarded Europe. This therefore prompts Australia to adopt appropriate fiscal policies that will help it to counter the challenges posed by occasional fiscal deficits and public debt. A system should also be in place to facilitate proactive and faster decision making in response to changes in the economic, political and cultural environment in order to serve the public efficiently and effectively. Effects of Euro Crisis on the World The euro crisis has indeed impacted significantly on the world indicating the fact that the world is indeed a global village and that what happens on these end, definitely has to be felt on the other end. United States for instance has had to contribute to the bailout package for purposes of bailing out the various afflicted European countries. China on the other hand has been impacted negatively by the euro crisis. Chinese Yuan having been pegged against the United States dollar has appreciated against the weakening euro hence adversely affecting its exports to the European countries. The economy of China is export driven and thus changes in the volume of exports have direct impact on its economic growth. This therefore implies that China is favored economically when the value of the Euro is high whereas devaluation in the Euro has grave effects to its political growth. Developing countries have not been left out by the span of effects that the European crisis has posed. Most of the developing countries that export most of their goods to Europe have experienced a sharp fall in the volume of exports due to the decline in value of the Euro. Apart from the fall in the volume of exports in the countries that channel their exports to Europe, the prices for their exports were affected negatively leading to losses by the businesses operating in such developing countries. As a means of cutting on costs in order to minimize the burden of loss as a result of poor exports revenue, such firms lay off workers and in some cases may close operations in some subsidiaries. This will have an overall effect of unemployment and the resultant increase in the dependency ratio. The country’s residents will therefore not be able to save hence low levels of investment. Such countries finally record decline in economic growth. Trading partners of Europe that export goods with high income elasticity therefore have their share of the negative implications as demand for their exports decline leading to enormous losses. This therefore implies that, countries whose economies are export dependent will run into a series of economic crises leading to long term negative implications on their economic performances. Moreover, the countries that are highly dependent on aid flows from European countries will have to go through general economic, social and political difficulties as they lack effective policies to counter the grave effects posed by the Euro crisis. Global economies will still grapple with the increasing levels of unemployment caused by withdrawal of European investors from their countries. Countries that initially partnered with Europe have shifted focus to thriving economies like China, Australia and Japan. In general the Euro crisis is no longer a European crisis but a global crisis as the effects of the event have significantly rippled across the globe. A Case of Spain Spain was once the most powerful nation in Europe in the 16th century owing to its presence in the Americas. This trend persisted until when the Spanish civil war occurred. However, Spain’s growth began to increase since the end of the civil war in 1939. This development came to be popularly known as the ‘Spanish miracle’. Currently, the major constituents of the county’s economy are tourism industry and agriculture. Spain joined the European Union back in 1986 and subsequently adopted the Euro in 1999, making it to share a common currency among the other eleven member countries. Spain became a subject of success in the European Union but the success happened to be unstable as much of the growth was derived from the housing bubble. The financial deregulation, low interest rates, rising domestic incomes and the high demand for foreign investment, kept the looming economic crisis in darkness (Martin, 2012). Spain focused its attention only in the real estate business while disregarding development of other significant sectors of the economy making its economic conditions to dwindle given the instability caused by the overreliance on the real estate development at the expense of other sectors of the economy. Therefore, the burst of the housing bubble coupled with the global financial crisis brought Spain’s banking sector to a crushing halt. This was as result of overinvestment in the real estate business which greatly destabilized the banking sector. This saw the European Union member states in 2012 provide funds to the Spanish government for purposes of recapitalizing the stricken banks. In addition to these, the Spanish regions of Murcia, Catalonia and Valencia found themselves in a financial difficulty. This further proved Spain’s efforts to revitalize the economy more futile. Spain therefore has to undertake intensive labor reforms and banking sector reforms in order to restore growth and reduce unemployment. Political Characteristics Spain is both a social and a democratic state where the sovereignty of the people is upheld. It is from the people that the power of the state emanates in Spain. Spain’s form of government is a parliamentary monarchy with the prime minister as head of state. However Spain’s politics have been to blame for the problems experienced in the banking system. The tax returns from the tremendous growth made the previous governments to be complacent leading to a false sense of security. This led to the failure of the government to set up measures to curb fiscal deficits and public debt. Moreover, the government established political savings banks which led to failure in regulating commercial activities in the countries. Economic Characteristics Spain is comprised of 17 autonomous regions and two autonomous cities. Spain’s economy is the fifth largest in Europe. It was regarded as Europe’s most successful economy until 2008, for attracting considerable amounts of foreign investment. Trade contributes to more than half of the country’s GDP. This therefore indicates that trade plays a major role in the economic growth of Spain. The competitiveness performance of Spain has been boosted by the existence of large market for its national companies, improved infrastructure and the excellent technology adoption. The weak macroeconomic stability and the inflexible labor market have led to sluggish economic development in Spain. Furthermore, the inflation in Spain rose above the European Union average which will result in less real disposable income by households as long as it persists. Cultural Characteristics The cultures of Spain are spread across its seventeen autonomous regions in the country. Spain’s cultural landscape may be spectacular, however, there exists regional differences due to lack of overall unity. The national language of Spain is Castilian Spanish. Strong cultural distinctions still exist despite attempts by the government to establish a unified Spanish culture. The southernmost region of Spain called Andalucía is distinct because of its rich influence of Arab culture. Social Characteristics Spanish people are very social individuals who value rapport in every engagement. Physical contact is a common characteristic in conversations involving Spaniards. Spaniards are easily hurt when disregarded or embarrassed in front of people. Possible Implications and Contingency Planning for Australian Business The Euro crisis has had a variety of implications on Australian business both locally and internationally. The resultant inflation rates have persistently reduced the disposable real income of the households in the respective countries have significantly reduced the demand for their products. The austerity measures undertaken by various European countries have negative impacts on Australian businesses operating in Europe (Bartram, 2006). The increased tax rates will serve to inflate the costs incurred by Australian businesses abroad. The reduction of government spending in European countries will lessen the ability of the people to purchase products produced by Australian businesses. This is because cuts in government spending by countries will reduce the volume of money in circulation in the economy hence reducing demand. Increased rates together with regulated lending by commercial banks in Europe limits the amount of capital the businesses can access in order to increase investments or finance its operations. On the other hand, Australian businesses have gained significantly from the Euro zone crisis locally. The euro crisis led to massive unemployment which saw the exodus of young skilled European nationals to Australia in search of employment. This facilitated access to quality labour by Australian businesses from the European immigrants. Furthermore, the businesses in Australia gained a significant market size owing to the withdrawal of major European firms from Australia. This had the impact of reducing competition from such businesses. The Australian businesses however need to undertake contingency planning strategies in order to stay immune to the adverse effects of the euro crisis. In order to mitigate potential financial risks, the Australian businesses should strive to reduce their euro based investments in order to minimize the impact of euro crisis likely to be suffered. The Australian can also reduce exposure to potentially vulnerable European suppliers. This will be aimed at establishing reliable suppliers to that will deliver consistently to the firms. Another way of pacifying the Australian businesses against harmful effects of the Euro crisis, is initiating a process of overall modification of the foreign risk management strategies. Finally, Australian businesses can reduce customer and counterparty credit exposure. This will ensure that these firms/businesses stay afloat amid turbulent economic conditions occasioned by the euro crisis. Strict observance of the set contingency planning policies should be facilitated and embraced unanimously. A Case of Leighton Holdings Leighton Holdings is an Australian construction company based in Sydney. It was founded in 1949 and later listed in the Australian Securities Exchange (ASX) in 1969. The Leighton Group’s Operating Companies conduct business in 22 countries one among which is Spain. Operating in Spain therefore has posed great challenges to its growth and survival under the unstable economic condition in Spain. One of the recent challenges that faced Leighton Holdings is the move by government officials that saw the executives of the company ousted. The government further facilitated purchase of majority shares by one of the local construction company, Hochtief. This move raised concern among the shareholders and the public regarding the position of the government on foreign investors. In an attempt to restore its economy, Spain seems to be sacrificing foreign investors in favor of local companies. Such moves are plainly political and can imply that the government is reluctant to support foreign investors in the country. Another effect on the operations of Leighton Holdings is the overall implication of increased taxes on the efficiency and performance of Leighton Holdings. The overall outcome of increased taxes has far reaching effects on both the consumers and the firm. Leighton Holdings therefore was affected by the fiscal policies in Spain, a fact that saw its profits decline significantly. Moreover, the patriotic culture of the Spaniards has seen the firm struggle amid stiff competition from the local construction firm Hotchief. Leighton Holdings has therefore gone through immense challenges that have consequently led to setbacks with much of the effects attributed to the stage set by the euro crisis. It is therefore evident that any event that adversely affects the economic wellbeing of a particular state or region will be felt in one way or another globally. References Bartram,, S., & Karolyi,, G. (2006). The impact of the introduction of the Euro on foreign exchange rate risk exposures. London : Sage . EU (2011) European Union Statement by the heads of State or Government of the Euro Area and EU Institutions, Brussels, 21 July. Martin, P and Johnston, E 2012, ‘RBA defends banks after downgrade,’ The Sydney Morning Herald. Read More