QUESTION

“An essay on any current economic news”

The purpose of this essay is to encourage you to think carefully about subject content, relate this to actual events or issues as reported in any of the various media such as newspaper,journal articles, magazine andwebsite. A printed copy of your selected article must be firmly attached to your essay.

Discuss and relate the article selected to some theory, model data or idea introduced from any ECON104 topics.

Marking Criteria

This assessment item will be marked according to the following criteria.

1. Cover page included, with essay title, student name, student number, and tutorial time/room number clearly stated. (2 marks)

2. Structure– Essay format with Arial 12pt font, 1.5 spacing and single sided printing. (2 marks)

3. The extent to which subject material covered in lectures and/or tutorials is relevant to the selected article. (4 marks)

4. Coherence of the written work,skills of application and criticism demonstratedon the related topics. (12 marks)

SOLUTION

Contents

What is Eurozone Crisis. 1

World After Eurozone Crisis. 1

Eurozone Crisis: Possible Solution. 2

References. 3

What is Eurozone Crisis

Single currency was introduced in 2002 as the common currency for the European Union comprising of 17 countries. The European Union upon its existence became the largest trading are in the world wherein some of the most powerful nations including France and Germany started trade on a common platform and removing the economic barriers which provided enough rivalry for the dollar in the international market.

Eurozone with huge potential and the market attracting investment resulted in deficit being created in the regionleading to eurozone debt crisis. This resulted in stronger nations in the union to implement strong austerity measures on the nations like Greece and Italy which are hit most badly by this crisis. Thus it can be said that the Eurozone crisis were much attributed to the lack of political integrity even though the monetary intergity had been established in the region (Kenny, 2012). It has been said by the analyst that the stronger nations of the union wanted to establish the union even though the smaller and weaker nations had shown the inability to fulfill the criteria for becoming the member. Thus the weaker nations were made part of the union even without fulfilling the criteria may have led to the downfall as it can be said that they were not yet mature enough to sustain in the global competitive market.

Such is the impact of the Eurozone crisis that it has led to the instability in the financial markets all over the world especially in the developing countries. Thus this has led to the questioning of the future of Euro as a currency and the sanctity of the Eurozone.

World After Eurozone Crisis

With the economic debt crisis in Europe has sent wave of unrest in the world. Some of the financially sound countries have gone in for the buying of the government bonds. The idea is to give away the risky assets and invest in the less risky ones. The countries have been affected by the bond markets which have performed the worst. Thus the stable countries are moving away from investment in such bonds. The effect of eurozone crisis can be made from the fact that US treasury yield fell to all time low during the time eurozone was worst hit.

The possible scenarios of the eurozone crisis has been attributed to the debt driven Greece and Italy. The possible scenarios thus can be seen as orderly restructuring of Greece and other nations (Kenny, 2012). Another scenario is the break up of the eurozone which has led to downside of the international markets.

In the wake of orderly restructuring not happening may lead to worsening of the financial assistance to the debt laden countries of eurozone and will put pressure on the banks and other financial institutions and may also lead to their failures. This will also result in further imbalance in the international markets.

The impact is on the whole world as US funding to IMF will also reduce in the anticipation of using these funds for bailouts. This will put more pressure on the government and the tax payers (Alessi, 2012).

This is to say if the serious and constructive steps are not taken, the crisis which started with eurozone crisis and which is already impacting the world may lead to further deterioration in the market which will possibility erode away the most sound of the economies of the world.

The impact on the small countries will also be huge as they have lot business opportunities that have come up after Eurozone formation. Thus the markets in such countries which are not yet developed will be at risk of performing over a long period.

Also this will have a lot of political implications such as there will be tension created as a result of the debt crisis not being resolved.

Thus the world after the eurozone crisis is looking at resolving the issues as early as possible as it will have huge impact on the whole world. The possible solutions that have been worked upon and further suggestions have been discussed in the next section

Eurozone Crisis: Possible Solution

Financial Austerity which is the application of higher taxes is not a solution to it. It can be seen that this situation has arisen because of the huge spending of small nations and not the unavailability of income for the government. Also if the taxes are increased the income will come down and thus the taxes. Thus this will lead to less growth of the small nations and thus less payment of debt. Thus the financial austerity is not the solution to this problem.

The Eurozone crisis has led the European union to take steps centralizing the governance and better coordination of fiscal policy and the economic policy. In the light of it a fiscal union has been formed (Alessi, 2012). Another important step that has been taken is to establish stability mechanism which is European Stability Mechanism. This will be the permanent bailout fund of above $600 billion

The European Stability Mechanism will replace the European Financial Stability facility. The European Financial Stability facility will expire by 2013. The lending capacity will be reviewed regularly in order to access the potential threats and so that the timely steps can be taken,

With European Stability Mechanism coming into force the effective lending will be increased as well as there will be increase in maximum lending guarantee.(Dadush,2012)

Also many members of the Eurozone does not have legal institutional structures in place. Thus the steps need to be taken that the legal institution structures are in place.

Another possible but least likely and favoured solution is the breakup of Eurpoean Union. In such a case the belief in the markets will be disturbed it will also lead to the conversion of debt to non performing assets and thereby impacting the profitability and the future of the banking industry all over the world.

References

Christopher Alessi. (2012). The Eurozone in Crisis. Available: http://www.cfr.org/eu/eurozone-crisis/p22055. Last accessed 28th Apr 2012

Thomas Kenny. (2012). What is the European Debt Crisis?. Available: http://bonds.about.com/od/advancedbonds/a/What-Is-The-European-Debt-Crisis.htm. Last accessed 28th Apr 2012

Uri Dadush. (2012). Paradigm Lost: The Euro in Crisis. Available: http://carnegieendowment.org/files/Paradigm_Lost.pdf. Last accessed 28th Apr 2012

Slaughter & May. (2011). Eurozone Crisis: What do clients need to know. Available: http://www.slaughterandmay.com/what-we-do/publications-and-seminars/publications/newsletters-and-briefings/2011/eurozone-crisis—what-do-clients-need-to-know.aspx. Last accessed 28th Apr 2012.

Contents

What is Eurozone Crisis. 1

World After Eurozone Crisis. 1

Eurozone Crisis: Possible Solution. 2

References. 3

Oil Prices: Impact on the world

The macroeconomic effect of the rising oil prices across the globe cannot be negated as it impacts the huge economies of the world like United States as well as shatter the strategic and budget planning of small developing nations of the world. As it has been seen the majority of the world is importing oil from the West Asian nations like Saudi Arabia, Kuwait etc. has led to the somewhat like monopoly scenario in the global market.

Thus a slowdown has been witnessed in almost all the markets of the world.

Oil Prices impact the foreign reserves and thus the foreign exchange rate as well as it has huge impact on the GDP of a nation. Another important point is that the oil prices are very volatile and thus makes it very difficult for the nations across the world to develop strategy and plan accordingly.

Another important aspect of Oil Prices is inflation. Inflation is directly related and very sensitive to oil prices. The detailed discussion on oil prices hike will be done in the subsequent section but it is point worthy to note that the rise in inflation rate has generally occurred due to lack of awareness of the government on implementing changes in monetary policies to incorporate the rise in inflation due to oil prices.

There are several factors that govern the rise and fall in oil prices thereby impacting the world economies. These factors range from disruption in middle east to the eurozone crisis and also the subprime crisis in United States of America. The disturbances in the middle east for example are like in recent past the prices in fuel price have increased due to the upset in Syria and thus interrupted the supply of oil (Blanchard, 2007). Also in the recent past the United States announcing and asking the world not to procure oil from Iran has led to increased prices as other countries were not able to meet the demand that has been caused.

The world looks at the oil prices as a benchmark for analysing the cost and other factors that impact the doing business.(Vanderbuck,2011)

Effect of Oil Price on Inflation

The oil prices directly impact the inflation in the country. This can be illustrated by a small consideration. An increase in oil price will result in the depletion of foreign exchange reserves for a country and thus deplete the value of currency in the international market. Thus the value of the currency will be reduced resulting in increased prices and thus the inflation is experienced in the country.

However the government have understood the importance of monetary policies and somehow to a certain extent they have been able to control the inflation, but at times it can be seen that the oil prices have increased so much that it becomes very difficult for the governments to control inflation.

It can be seen from the past experiences that the countries like Japan that have huge dependency on the imports of oil has resulted in deterioration of the prices. Thus the oil prices not only impact the imports but also the value of the currency of a country.

Also the oil industry is capital intensive. Thus even a small increase in price result in huge impacts as it impacts the financial institutions (OECD, 2011). It can also be seen that the recession in United States has been because of the increasing oil prices. United States has huge dependency on the imports of oil. According to an article that was published oil prices impact the economies as with an increase in price of per barrel of oil by $5 in the market result in decrease in gross domestic product by 0.25 basis points.

This can be analysed and acknowledged that such huge impact is too much for developing countries like India and China.

The oil prices increase that has impacted the growth has not helped the recovery even when the oil prices are reduced to older level (Blanchard, 2007). Thus it can be said that it takes time for the economy to grow and bring the GDP back on track asthe inflation cannot be controlled with oil price alone.

This is because the oil prices not only impact the inflation but also the other factors, which in other terms effect the growth in an industry. Oil has become most important commodity and has made countries to put in efforts to control the parameters that have effect on the growth of the economy.

Oil Prices: A Future perspective

Most of the countries are going in for hedging that is t say they have tied up with oil producing nations for at least half of their requirement at a certain price. For there they are taking the market price which is dependent on the demand in the market. Thus the countries have hedged their risk in the market.

OPEC that is the association of oil producing countries also have been taking steps to stabilize the oil prices in the market by increasing the supply by increase in demand so that the huge variations in the oil prices can be controlled.

Also the countries are switching towards alternative sources of energy so that the dependency on the oil can be reduced. This will assist the countries in reducing the risk of inflation and thus the growth of the nation.

To protect the nations and economies especially the developing economies from having huge impact because of the increased prices the dependency has to be maintained on oil price (Williams, 2011). This can be by limiting the oil price by the amount of demand. This is to say benchmarks should be there for the demand in a country. Levels should be maintained and thus control should be there. In the absence of controlling the oil price will increase extraordinarily  and thus take the world into another recession.

References

James L. Williams. (2011). Oil Price History and Analysis. Available: http://www.wtrg.com/prices.htm. Last accessed 28th Apr 2012

OECD (2011), “The Effects of Oil Price Hikes on Economic Activity and Inflation”, OECD Economics Department Policy Notes, No. 4.

Vanderbruck. (2011). Impact of Credit Downgrade on Oil Prices. Available: http://www.oil-price.net/en/articles/credit-downgrade-downfall-petrodollar.php. Last accessed 28th Apr 2012

Olivier J. Blanchard. (2007). The Macroeconomic E®ects of Oil Price. Available: http://www.crei.cat/people/gali/pdf_files/bgoil07wp.pdf. Last accessed 28th Apr 2012.

Nouriel Roubini, Brad Setser. (2004). The effects of the recent oil price shock on the U.S. and global economy. Available: http://pages.stern.nyu.edu/~nroubini/papers/OilShockRoubiniSetser.pdf. Last accessed 28th Apr 2012

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