Impact of Euro Crisis on Securities Trade Transactions - Research Paper Example

European Political Economy Impact of Euro Crisis on Securities Trade Transactions Introduction Ever since the end of World War II, the European Political Economy can be defined as a capitalist economy. It had incorporated within itself efficiency, economic effectiveness, higher living standards and significantly higher economic growth rates1. The magnifications of the European Union actually facilitated it in overcoming all the domestic and international challenges with regards to wars and economic perspectives (THE FUTURE OF THE ECONOMY IN EUROPE, 2013). The European Central Bank has been performing significant role in this regard and therefore its monetary strategies have also been substantial enough. However, the current Euro Crisis has given a setback to the overall European Economy in and addition to this there have been other challenges as well for the EU to deal with. For instance, manage the huge climatic changes which influence trade and commerce, provide extensive security and conservation of energy, ensure the sustainable expansion on the basis of environment, looking after the vast changes in overall demographics of the country and compensating the large immigration in terms of economy. All these issues along with the major Euro Crisis have contributed to consequently affecting the trade transaction of European Central bank (THE FUTURE OF THE ECONOMY IN EUROPE, 2013). This indicates that Euro crisis has significantly influenced the banking system of the region which has substantial impacts over the international trade markets as well. This has forced the closure of many renowned and profitable banks of the region, for instance Laiki2, the second largest bank of Europe, would be closing down this year and its deposits would be shifted to some other banks (WAITING FOR THE FALL-OUT, 2013). In this scenario the security trade transactions of European Central Bank are expected to get affected by the overall situation since they play a significant role in the economic development and therefore they are substantially affected whenever a financial crisis hits the European region. This research paper aims to discuss that how Euro crises has affected the security trade transactions of ECB and to what extent. Later in the paper, discussion towards the research question is provided in addition to a succinct conclusion. International Trade Securities These are the financial instruments which can be traded throughout the globe. They include derivative contracts, equity securities and debt securities3. The role of European Central Bank is to ensure the trade transactions of these securities which bring a significant foreign exchange to the country. This is done through providing facilities of settlements in relation to payments and securities. Furthermore, ECB is responsible to operate Euro on the basis of a large-value system and to establish strategies in regard to securities traded on the national and international level. The requirements of the business sector are handled by the ECB in order to monitor the securities trade, and also to identify and tackle the illegal activities in the same regard. (PAYMENTS AND SECURITIES, 2012). The international market of securities trade and transactions has a significantly challenging environment since the overall operations and activity of the ECB are controlled by the external economic and political conditions. These are broadly categorized as the macro economic factors which are completely beyond the control of people dealing with such transactions. This clearly indicates that whenever there would be a financial crisis in the international market, the trade transactions of securities being conducted in the European Central Bank would be directly affected, consequently leading to the decline in demand of European Securities. The global politics and economics in addition to certain business operations, regulatory and administrative issues have actually influenced the security trade transactions in a substantially negative way (ROBERT CHLUCH, 2012). Research indicates that until 2008 the change in demand of securities was not substantial enough, but it significantly declined by the mid of 2011. By the end of 2008 the number of investors investing in equities and debt securities were remarkably low. However, analysts also suggests that although Euro Crisis significantly influenced the trade transactions, the overall status of Euro was least influenced and therefore it was able to maintain good market value among the international trade currencies (THE INTERNATIONAL ROLE OF THE EURO, 2012). Impact of Euro Crisis over the Trade Transactions The trade transactions of securities in the European region have been greatly influenced by the risk aversion of investors, thereby ultimately leading to the withdrawal of risky and complex securities. In addition to this, the crisis has brought an institutional system which is difficult to understand and involves legal issues largely agonizing for the foreign investors. It was noticed that the investors have withdrawn only those securities which were offered at comparatively higher yields4. Additionally the overall situation has also affected the issuance of bonds and other financial instruments. Analysts have identified that the decrease in security transactions was observed in some of the European Countries. However, other countries had experienced setbacks due to the lapse in financial markets but the loss was not substantial enough (THE INTERNATIONAL ROLE OF THE EURO, 2012). It all started with the collapse of Lehman Brothers in 2008 which created noteworthy decrease in the trade transactions of the securities. The fall of Lehman Brothers actually contributed to the breakdown of VIX index by the end of 2008. This subsequently led to the breakdown of long term debt securities and equities (THE INTERNATIONAL ROLE OF THE EURO, 2012). The fall of Lehman Brothers was actually caused by the organizational crisis and the lack of proper management. The company failed to interpret the changes in financial market and therefore the management was unable to make an early analysis of the future crisis. This indicates that organizations especially dealing in the financial markets are strongly required to keep a check over likely situations of crisis so that they can ultimately turn the potential loss in to a real business opportunity. The events of 2008-2011 compelled the ECB to demonstrate a proper crisis management strategy for the financial institutions so that they might not experience similar losses in future (STEVEN H. APPELBAUM, 2012). The Euro Crisis and its subsequent affect over the security trade transactions consequently influenced the corporate sector and the European Monetary Union. The business sector which was most significantly affected by the decline in demand of European Securities was Information Technology5. The Euro projects concerning Information Technology are the biggest and most essential assets for the overall financial system since they are responsible for the development and execution of all the financial and accounting prospects (ALAN HAWLEY, 1999). Discussion The European Crisis has gain significant attention in the last few years because of the reduction in those trade transactions among which securities constitute a larger proportion. The crisis has cut back the foreign investments in Europe, consequently affecting the internal and external trade of securities. Due to the collapse of major financial institutions such as Lehman Brothers, foreign investors declined to make investments in Euro Securities. The crisis began in 2008 and the situation got worst by the mid of 2011. During this time period securities trade transactions were significantly influenced, thereby affecting major economic sectors. The Euro Crisis and the subsequent loss faced by the European Central Banks required the international financial markets to make substantial changes in financial and economic policies so that the financial and monetary institutions of European Union could be saved from such a drastic loss in future. The major corporations would also have to participate in order to reduce the impact of overall decrease in securities transactions (THE EURO ZONE CRISIS: THE CORPORATE BRIEFING, 2012). ECB must introduce new risk management strategies so that the prediction of Euro crisis could be easily made before hand and also the relative precautionary measures could be taken in this regard. There should be a systematic regulation of risk in addition to the availability of transparent information for the foreign investors. The proprietary trade should be separated and the overall financial system should be re-evaluated for its performance and productivity in terms of increasing the security trade transactions. To effectively executive all these strategies so that the best possible outcomes could be achieved, the involvement of major financial institutions of the world such as World Bank and International Monetary Fund is indispensable. However, the effects of Euro Crisis over security trade transactions could not be easily diminished and therefore ECB is required to ensure that no such crises take place in future (A. GUPTA, 2010). Conclusion The overall research including literature review, findings, descriptions and analysis of the Euro Crisis signifies that YES, the Euro Crises have caused a significant decrease in the international trade transactions of European Central Bank, particularly dealing with the securities such as equity, debt etc. The crisis started in the year 2008 when some major financial institutions of the European Union collapsed giving rise to Euro Crisis, which ultimately affected the international financial market and the trade transactions. As a result the foreign investors declined to purchase the European Securities primarily due to high risk attached to them and also because of the prevailing political and economic uncertainties. In this condition only those investors participated in the security trade transactions who were interested in generating higher profits with investments in significantly risky securities of the time. The number of such investors was not substantial enough and therefore there was a decline in the securities trade (LLIAS KAPSIS, 2012). This concludes the first part of the research paper. The second part which had a comparative low proportion dealt with the impact of decline in securities transactions on other economic sectors i.e. to what extent the Euro Crises have influenced the European Union. Research indicates that the most significantly influenced economic sector was Information Technology as it directly deals with the national and international systems of finance and accounting. In addition to this the productivity and performance of corporate sector was also influenced as the number of foreign investors was significantly reduced. Lack of risk management and proper implementation of strategies in regard to the financial, economic and political institutions actually gave rise to the Euro Crisis. This indicates the ECB requires developing novel financial plans so that the forecasting of such incidents could be ensured for the future. References A. Gupta, 2010 "Financial crisis enforcing global banking reforms", Business Strategy Series, Volume 11, Issue: 5, page 286 - 294 Alan Hawley, 1999 "European Monetary Union: Legal compliance for IT systems — Après ‘Le Weekend’", Journal of Financial Regulation and Compliance, Volume 7, Issue: 4, Page 361 – 378 The Euro Zone Crisis: Corporate Briefing, 2012, Hogan Lovells, viewed: 30th March 2013. Ilias Kapsis, 2012 "Competition law and policy for the EU banking sector in a period of increased economic uncertainty", International Journal of Law and Management, Volume 54 Issue: 4, page 284 – 301 Payments and Securities, 2013, Germany: European Central Bank, viewed: 29th March 2013. Robert Chluch, 2012, A Summer for European Securities Lending, BNY MELLON, viewed: 30th March 2013. Steven H. Appelbaum, Seth Keller, Harold Alvarez, Catherine Bédard, 2012 "Organizational crisis: lessons from Lehman Brothers and Paulson & Company", International Journal of Commerce and Management, Volume 22 Issue: 4, page 286 – 305 The future of the Economy in Europe, 2012, LSE European Institute, viewed: 26th March 2013. The International Role of Euro, 2012, Germany: European Central Bank, viewed: 26th March 2013. Waiting for the Fall-Out, 2013, The Economist, viewed: 25th March, 2013. Read More