European Business Essay
According to the major political economists the basic prolific loss of the financial sovereignty is one of the reasons for which the southern periphery fared so badly in the crisis of Euro area. Financial sovereignty or the monetary sovereignty actually means the ability of the central bank to actually devalue the major exchange rate or to buy the government debt by printing the domestic currency. Many economists like Hall and Scharpf have argued on the fact that the Southern European economies basically lack the major institutions to potentially restrain the increased wage in line along with prolific growth of the productivity, and therefore potentially needs exchange rates adjustments (Aizenman, 2012). Whereas Grauwe, another economist explained another major aspect of the monetary sovereignty. It stated the money can be issued namely from the central bank of a sovereign state by which government’s bonds can be brought, but in case of the Euro area within the sovereign cannot basically create money to buy out their own debt. In this prolific case Sovereignty is very much important as in this sense it is valuable because the monetary authority can actually act or work as the lender of last resort to the government during crisis.
Countries with different exchange rate regimes fared in the crisis.
During Financial crisis in the year 2008, there were nearly 27 states that were in EU. Out of those 27 states only 16 used the Euro. The other states were allowed to use their currencies against Euro. Several countries such as Latvia, Bulgaria and Lithuania joined the Estonia to maintain a bare minimum parity in order to view the entry level of the Euro. The Czech Republic and Sweden also allowed their currencies to lower down in respect to Euro in the year 2008-09 but their currencies subsequently rises up again by the year 2008 and 2012 (Bibow, n.d.). Pound in UK also fell by the year 2007 to 2009 and almost by the year 2012 it regained its value that was way back in 2008. The entire process just left the three countries with a depreciated exchange value which are Hungary (-13%), Poland (-16%) and Romania (-17%).
In the table stated below we can understand the GDP growth in the year 2008 to 2012 for all the countries that are divided into three groups. One that has been able to hold the currency, the one that had sustained the depreciation and the ones where the crisis was being removed in the phase of depreciation. The table also reflects the figures for the member of Euro that has the worst performance. The entire model experience was about 5% that are found in three of the four types of regimes. The exchange rate technique is the most important tool that supports the argument of the observations that are found in the worst economic performances in Euro Crisis.
But by June 2013 we get another scenario that looks at the latest forecasting GDP growth table. We can clearly figure out from the above table how Euro was a big problem in all respect. The Non euro members are also predicted to have a positive growth in the year 2012-2014. There are many non-Euro countries that have also received a sharp deadline in the GDP section from the year 2008-2012. For example in case of Latvia, the exchange rate might be imposed at an high cost form the year 2008-2012 but we can easily find the turnaround in future (Boyer, Berend and Haba, n.d.).
The political economists that maintains the comparative edge over the other missing variables explains the pattern of the results for the domestic adjustment. As for example the internal devaluation led Lithuania and Latvia to be in the list of fixed outsiders. The below table 3 helps us to understand the fates of the countries in terms of crisis. The exchange rate for the Southern members of Euro has also depreciated efficiently but not so much as found in case of Ireland. The below table also highlights the two most important observations one is the fixed rate countries under the euro area and the exchange rate for the promotion of competitiveness (Darvas, Breuss and Micossi, n.d.).
There are several critics that produce the competitive edge to enhance the argument to the next level. The weakest euro members accumulates the balance in 2000 to improve the financial crisis so that they don’t have to undergo structural measure to adjust the growth rate from the state of long term imbalance that have been provided by the Euro crisis (Knight, 2012).
Countries experience inside and outside the Euro area
In this study it has been already seen that how the different countries in Europe have faced the Euro crisis and how they have overcome with the crisis. The exchange rate regimes of the European countries have been discussed and have been seen that how the exchange rate has made difference in the GDP trajectories among the European countries. This difference cannot be mapped as per the changes in the “competitiveness or exchange rates”. In this section the countries which have undertaken temporary depreciation have been kept aside and two different countries have been taken into consideration for detailed study. For country inside the Euro area Greece has been taken to make a detailed study and for country outside the Euro area Latvia is taken into consideration. Greece’s crisis has been the worse because of the limitations of the stabilization in the Euro area. Latvia is considered because of the fixed real exchange rates outside the Euro area. These two countries are explained in details because of the high rate of external assistance needed by them during the Euro crisis period. The detailed study is shown further in this section below:
Greece came last in the chronological order and a delayed onset of the crisis has made an important aspect to study and understand the Euro membership that has made difference in the stabilization during the financial crisis. The desire of the Greek public finance was well known but the ECB helped the country to meet the liquidity need to end up the crisis in the country. It is important to consider the success of the ECB to understand the Euro crisis in the country (Pisani-Ferry, n.d.). This is because the ECB has helped the country to meet up the crisis. Here it is discussed that why the currency union of Europe have put more stress on the sovereign debt crisis in place of banking crisis.
It was found in the crisis in the Greek Sovereign debt was not in question during the mid-2009 because of the non-presence of the ECB supporting the market for the government bonds. It was found that banking system was lending freely to the countries and there was no reason for ending the process. It has been seen that the European banks kept on expanding their loans till the end of the 2009 but later on the need for the ECB came into consideration when the European banks were unable to fulfill the need of the country. For this purpose the equal treatment of the sovereign debt in the Euro area was done to meet the need of the banks to support the crisis of the country. The Sovereign debt helped the country meet up its Euro crisis. The banks started transferring the holders of the Greek debts to the ECB in return of valuable cash to meet up the crisis (Prokopijevic, 2010). By the end of 2009 ECB changed their lending strategy to lower grades bonds. This effected Greece a lot and a alarm bell was rang among the bond holders of Greek and the Greek government started raising the planned deficit for the years 2009 from 3.7% to 12.5%. The Bank exposure to Greek is shown in the table below:
The first lending program was started in the year 2012 to 2013 as the Greek economy started contracting. The debt dynamics started becoming unstable. It was found that the debt burden of the country started becoming adverse day by day from 2009 to 2012. It was calculated that the accumulated primary deficit was about 7.1% of the GDP while debt ratio increased by about 40% of the GDP. This has been shown in the table below:
The problems in Latvia are different from that of the other countries. The main problems were in the private financial sectors but not in the public financial sectors and this were exceptionally of low debt. In the year 2008, the government forcefully took over Latvia’s largest private bank Parex Banka because of the run off of deposits. It was found that the level of expats deposit was much higher than that of the residential deposits. These deposits result in the most footloose of the country that felt by 30% in one year (Vranceanu, n.d.). The country also faced a risk of contraction of sharp credit in the banking system of the country. For Latvia’s Stabilization program as a fixed exchange rate member ERM II was made and the country was forced to be its member for the coming two years to meet up the crisis of Euro in the whole continent among the countries which were related with each other due to the globalization of the business. The country faced lots of problems in the banks debts and the bank exposure is discussed in the table below:
In this particular module, we have prolifically analyzed and studied about the Euro area as an international system of monetary. We clearly studied, analyzed and examined the major sources and resources of stabilization that the Euro area clearly provides to a Europe country (Greece) in trouble. We literally found out that the major rules that govern the EMU’s cooperative institutions actually faced major and drastic consequences for Greece. To explain in other words the crisis in Greece was potentially huge and devastating with many other after-effects. It is noted that the Greek crisis arise basically due to the major operation of the Euro and government system not because of the breakdown during the moment of crisis. This actually shows the condition of the country’s economies along with the critics of major EMU, who faced major an overblown faith in the power of economic condition of states along with their own central banks and the currencies (Peet and La Guardia, n.d.).
Aizenman, J. (2012). Developing countries' financial vulnerability to the euro crisis. Cambridge, Mass.: National Bureau of Economic Research.
Arestis, P. and Sawyer, M. (2012). The Euro crisis. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan.
Bibow, J. (n.d.). The Euro Debt Crisis and Germany’s Euro Trilemma. SSRN Journal.
Boyer, R., Berend, T. and Haba, K. (n.d.). The euro crisis and European political economy.
Darvas, Z., Breuss, F. and Micossi, S. (n.d.). Euro crisis.
Knight, J. (2012). The Euro crisis for dummies. West Sussex: J. Wiley & Sons.
Peet, J. and La Guardia, A. (n.d.). Unhappy union.
Pisani-Ferry, J. (n.d.). The euro crisis and its aftermath.
Prokopijevic, M. (2010). Euro crisis. Panoeconomicus, 57(3), pp.369-384.
Vranceanu, R. (n.d.). The Euro Sovereign Debt Crisis and the Built-In Instability of the Euro. SSRN Journal.