how do you reply to this studen discussion reply: The Eurozone has some countrie
ID: 1218611 • Letter: H
Question
how do you reply to this studen discussion reply:
The Eurozone has some countries with severe debt problems: Portugal, Ireland, Italy, Greece and Spain ... sometimes known as PIIGS. These Euro countries are looking for and have been assured of a "bail-out" process so that no one defaults on their debt. What do you now think is likely to happen to the relative value of the euro?
Good morning fellow classmates. I worked ahead a bit because I leave on the 10th of June for a military training mission.
Over the last 10 years, Western Europe has allowed for free trade across borders and also allowed labor to cross boarders which has shown how Europe has moved from a much segmented mindset to an integrated political and economic area. According to an article in ProQuest, “Following the depreciation of the dollar relative to the euro after 2002, the financial press focused on the prospect that central banks with large and increasing stock of international reserves— especially those in Asia— may want to substantially diversify their holdings out of dollars and into Euros and, in the process, bring an end to the dominance of the dollar in official portfolios” (Reinert, Rajan, Ramkishen and Glass, 2009, Pg. 309).
As a current Soldier who served with the Spanish Army, I was surprised on how the Euro was worth more than my American dollar. Europe’s economic agenda (growth) has been the creation of the euro. This currency was about developing one type of money versus the lira, deutsche marks, francs , or pesetas. Many questions still remain about Europeans Central Bank and the Euro, whether it was a smart financial risk to give up national money and exchange rates or not. The key question is: What will likely happen to the relative value of the Euro? It all depends on who it affects!
If other European economies cannot adjust properly, then the loss of exchange rates would have been a bad idea. For example, what happens if Italian products lose demand and others areas of Europe (Germany) products increase, how will that affect the Euro? Therefore, in order to make this work, I personally think there must be a balance between labor and wages that is fair across all boarders. This idea falls on the policy makers to ensure this type of integration does not help one area and severely dimension another. This could have catastrophic affects on housing, labor, and health care as people will need to move where they can earn a fair wage and provide for their families. I understand the concept, but this could have very positive implications or very bad depending on how Europeans can come together to ensure future growth continues within that region. However, according to a recent article in ProQuest, “The Euro area has been doing better of late: growth of 0.4% in the first quarter (1.6% on an annualized basis) was the strongest in the two-year recovery; unemployment has fallen to 11.1%, its lowest in three years; and inflation is positive again. There has even been a surge of hope that Greece's membership of the currency may yet be preserved” (The force assaulting the euro; free exchange, 2015, Para. 1). I look forward on your responses.
Explanation / Answer
Greece is deep in debt. Nearly a quarter of its population unemployed. Its banks running out of money. There are all signs of economy spinning out of control. There is also a growing possibility of the Greek exit from the Eurozone which threatens the country to make the situation worse. So what went wrong?
After adopting the Euro in 2001, Greece’s competitiveness fell further behind many of its Eurozone peers. Germany and other countries had many stronger and export oriented business sectors. The Euro has been great insofar as it facilitates trade, but nineteen countries sharing a single currency has its problems. One of the reasons this crisis has been so confounding is that Greece’s monetary policy(how much money they can print) is controlled by the European Central Bank, but Greece’s fiscal policy(how much money they can spend and where they spend can be decided by themselves. While on the other hand Greece struggled to earn enough euros from abroad to pay for its imports. At the same time the Greek Government was able to borrow money cheaply because as a Eurozone member banks and other investors thought that a Greek treasury bond was safe. These Euros were used to pay pensions and other social benefits and appropriate taxes were not collected. Greece’s debt was growing faster than the overall economy for a longer time. It went worse when the global economic crisis occurred and thus dragging Greece into recession. Moreover the governments were understating the budget problems. This caused the investors to spooke and hence demanded more and more interest thus cutting off lending. To recover, Greece’s options were limited as it couldnot print money. Thus unable to refinance a debt, Greece needed a bailout. Its new creditors including the IMF and European Union demanded austerity which means raising taxes, cutting pensions, shedding workers and slashing spending. All these resulted in recession and high unemployment. Greece creditors demanded at that situation to make economic overhauls by cutting pensions, tax increases and loosening up labour rules in exchange for more bailout funds. Nearly two thirds of Greek voters in a national referendum rejected this proposal.What happens next?
Thus Greece has two scenarios, one is to practice tough economic overhauls and unlock bailout financing or a default on its debts and a collapse on its banking system. This would mean that Greek would return to the Drachma. But the value of Drachma would plummet immediately and thus drastically reducing the value of Greek’s savings and vital imports would become expensive. Government would not be able to borrow money so they need to make more money. This printing money will lead to higher inflation. The heavy economic disruption could push more businesses into bankruptcy. On the other hand if Greece were to leave the Eurozone(GREXIT) , it might reduce dependence on its European creditors for its loans decrease. The country would likely sink deeper into depression but the country would be able to control more of their means to recover themselves eventually.
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