Term Paper on "Financial Crisis in Peripheral Europe Nations"

Term Paper 4 pages (1312 words) Sources: 5

[EXCERPT] . . . .

Financial Crisis in Peripheral Europe

Nations on the edge of the eurozone, including some former economic darlings like Ireland, have recently come under intense pressure due to their high debt loads. Germany has been forced to bail out an insolvent Greece in order to maintain stability within the eurozone (Kulish, 2010). The surface-level cause of the trouble was the level of debt. In Greece, the budget deficit was at 13% of GDP in late 2009 and public debt at 125% (Walberg, 2010).

Many of the PIGS became awash in cheap capital. Low interest rates compelled investment in the PIGS nations as there appeared to be better opportunities. In Spain, Portugal and Greece, it was the development of vacation properties; in Latvia and Ireland there was optimism about strong economic growth. The IMF was compelled to bail out Latvia in 2008 in order to avoid a devaluation of the lat, which could have destabilized currencies throughout Eastern Europe (BBC, 2008).

In addition to cheap capital as a cause, internal trade imbalances in the Eurozone have been tabbed as culprit. Germany, a major exporter, saw its current account balance increase from 2003 through 2007, while importer Spain saw its current account balance decrease sharply over the same period. This has been the case with a number of other European countries as well. As a result, Spain saw an increase in inflation. When the real estate bubble burst, Spain was overpriced, which saw capital outflows, leaving the nation with high debt and low income (Krugman, 2010).

Such fiscal imbalances have placed the euro at risk. In the case of Greece, the financial situation was much worse than anybody realized because the Greek government cooked the books. As soon as this was discovered, the euro would naturally have lost value -- its underlying assets not being as strong as previously thought. The bailout of Greece has also caused a decline in the value of the euro as it required Germany to pump money into the country to prop up its economy.

Should the crisis continue, however, the damage to the euro could be far more severe. There are political consequences, in particular since politicians had promised that this scenario would not occur. Beyond that, the euro itself would need to be devalued if the trend towards instability on the peripheral economies continues. Normally, if trade partners have a strong imbalance of trade, their respective currencies can be revalued in order to accommodate that. With the eurozone, however, all of the countries have the same currency, taking away the prospect of currency revaluation as a potential solution. This makes it more difficult to reconcile the disparity in the trade. For example, the current solution of Germany bailing out Greece is essentially a very crude form of the type of redistribution that would be required, given that there is no option of shifting exchange rates between marks and drachmas. Until stronger policy levers are in place, the cycle of instability that this trade imbalance creates will result in general instability in the euro region. Foreign investors in particular will avoid the euro in favor of more stable currencies, ultimately driving down the value of the euro.

An even worse scenario would unfold if there was no bailout of Greece. This is the sort of situation that could occur if a much larger euro economy were to find itself in the same situation as the Greek economy -- Spain or Italy for example. Without a bailout, the offending country would essentially be removed from the euro. While the euro itself would suffer from short-term instability due to the high amount of uncertainty such a scenario would create, it would probably recover as the exercise would essentially be addition by subtraction with regards to improving the euro's long run stability.

One of the underlying problems that has emerged in the discussion of this crisis is with respect to the structure of the euro area.… READ MORE

How to Reference "Financial Crisis in Peripheral Europe Nations" Term Paper in a Bibliography

Related Term Papers:

International Financial Management Report Term Paper

International Financial Management

The sovereign debt crisis in the Eurozone -- focused on Greece, Spain, Portugal and Ireland but threatening to spread to other countries as well -- has been… read more

Term Paper 7 pages (2451 words) Sources: 14 Topic: Economics / Finance / Banking

---

Renewable Energy Alternatives, Including Wind Power, Biomass Literature Review

renewable energy alternatives, including wind power, biomass, and solar power. An analysis of the potential for solar energy applications in Greece is followed by an assessment of the impact of… read more

Literature Review 20 pages (6517 words) Sources: 37 Topic: Energy / Power

---

International Procurement Dissertation

School of Engineering and Design

Science in [your course title goes here]

This study investigates the circumstances in which buying materials and components from foreign suppliers can offer benefits to… read more

Dissertation 56 pages (15360 words) Sources: 20 Topic: Business / Corporations / E-commerce

---

Role of Private Investment on Economic Development in Iraq Literature Review

Role of Private Investment on Economic Development in Iraq

Private investment in developing countries

An overview on early Empirical studies

In 1980s, the developing countries encountered some increment in their… read more

Literature Review 40 pages (14411 words) Sources: 45 Topic: Economics / Finance / Banking

---

Effects of Outsourcing and Globalization on American Workers Term Paper

Outsourcing and Globalization on American Workers

Concept of globalization

Globalization is one of the extremely challenged subjects in social science. Spectators and theorists of globalization have severally reasoned that the… read more

Term Paper 8 pages (3111 words) Sources: 1+ Topic: Business / Corporations / E-commerce

---

View 100+ more related papers  >>