GLOBAL EFFECTS OF THE EUROZONE RECESSION

Abstract

The prevailing difficult economic environment has impacted adversely on global economic growth.  This has adversely affected performance of critical sectors in the worldwide economy. Banking sector has severely been affected by the adverse economic environment mostly Europe. Deficit spending in majority of Eurozone countries have further worsened economic environment. This has impacted on recession in majority of European countries. The situation has threatened emergence of yet another global economic recession all in worst case scenario the ‘world economic depression’. Optimistic economic growth targets have lowered as the prevailing conditions have made it impossible for such targets to be realized. The situation is threatening emergence of widespread credit crunch and bank run mostly in Europe. Economics and Finance professionals predicted the scenario will possibly threaten US economy as Europe and America economies are closely related. This means that, economic recession in Eurozone would quickly spread to the USA threatening the world economic economy. USA is lowly healing wounds caused by the USA economic recession in the year 2008. Reoccurrence of yet another recession will not only completely harm US economy but also have severe consequences to world economic growth and stability.

Introduction

Deficit budget over spending patterns in majority of European countries have made it unavoidable for them to largely depend on borrowing to finance government expenditures. Such loans extended to Eurozone countries have ended up being charged high interests rates as a result accumulations over the years. This has impacted on majority of countries eventually failing to finance such loans. Different treaties signed targeting at curbing government expenditures and controlling the loans to international banks other rich countries have all failed in totality. This scenario has worsened over the years making such countries to experience difficulties in accessing funds. The above closely related factors have threatened the global economy. Prevailing difficult economic environment both to business, citizens and also the Government have worsened the situation.

Causes of Eurozone Crisis

            Preparation of balanced budget proposal is very important for stable economic growth in any country. This will mean that expenditures should match with targeted revenues or slightly vary. However, in Europe this hardly achieved and majority of countries have continued to prepare exorbitant budgets to difficult to finance with the existing financial resources. This means that, such countries will solely depend mainly on borrowing or alternatively experience adverse effects of financial constraints in attempts to finance capital intensive expenditures.

Amount borrowed are rarely paid back as the mainly used in financing recurrent expenditures as opposed to more capital intensive projects. Effects of adverse economic environment have also been blamed for such a high credit default rates. Eventually, banks and other financing partners are left with no other option rather than charge huge accumulated loan charges to borrowing countries. This eventually impact on imposing large tax burdens to innocent citizens. This has led widespread economic crisis in majority of countries in Europe. Stakeholders have argued that the world greatest threat to global banking sector is the European crisis. [1]

Economic integration arrangements have also failed to counter the ever increasing national debts. Critics have argued that this is the main driver of the of the existing Eurozone crisis. This is justifiable as majority of governments in Europe do not have enough freedom to make critical economic developments decisions beneficial to their countries. Decisions are made on consensus acceptable by all countries. This is not the best strategy as economic and political environment significantly varies in different countries disregarding the fact that they are from the same region.

Majority of countries have continued to default repaying huge debts owed over the years. Adverse economic environment has also contributed to widespread economic crisis. The situation has threatened stability of banking system in Europe. World economic stability is also being threatened as the Eurozone countries plays influential role in world economy.

Poor economic decision making and exorbitant spending in majority of countries have contributed significantly in propelling the crisis. It amazing to note that, some small countries in the developing world are now threatening major economic powers in Europe. Growth prospects are shrinking at an alarming rate. There is need for quick and timely decision making, this will completely counter the crisis and protect the world from yet another economic recession or possible world depression.

Effects of Eurozone Crisis

            European economic crisis have had direct impacts on global economy. Estimates for global growth have been revised to 3.1% from the previous optimistic target of 3.2%. This was even worse as in 2012 projection fallen to 3.3% from 3.6%. Less developed countries have continued to out perform more developed countries in Europe. Real GDP in emerging markets aggregated to 5.6%, compared to 1.6 % for developed counterparts.[2]

Therefore, this indicates possible adverse conditions in European countries if appropriate actions will not be undertaken. The situation is even worse and professionals have downgraded GDP growth prospects from about 2% to approximately 1.7% in 2011. Major economies in the Eurozone have not been spared. Countries like Germany France have adversely been affected by the economic crisis. For Germany which is the largest economy in the Eurozone, Projections for growth have declined by approximately o.4% in 2011,and in 2012 targeted forecast dropped by 0.7%. In France the Situation was similar, projections dropped from 1.7% to 1.4% for 2012. USA has not been spared and growth forecast was revised down by approximately 1% in 2012. The crisis have also not spared business environment in the region. This has impacted on reduced consumer activities. This will possibly worsen the situation as such activities represent about 70% of the economy. The banking sector stability is also being threatened. Other countries Portugal and Greece have also been severely affected by the crisis.[3]

The crisis will likely spread to other countries if quick actions will not be undertaken. This will threaten world economic stability. The situation impacted on limited funding to majority of potential investors in the region. Overall, banks are very reluctant to extent loans to both potential investors and also national governments. This has resulted to emergence of adverse business environment. This will possibly worsen the crisis if appropriate actions will not be undertaken.

It is very important to consider potential impacts the long his will assist interested stakeholders in realizing the need to introduce more aggressive strategies which will counter potential impact in advance. It will assist affected countries in evaluating means of saving there economies from possible impacts of the Eurozone crisis.

Future projections

            Projections for the year 2013 are that the situation will be worse as most of the governments have been forced to lower expenditures. Fiscal drag might also result as tax cuts will have expired.[4] This means citizens of Eurozone countries will possibly experience slowed economic development pace which will have to affect their livelihood. Declined government spending may possibly force abandoning of majority profitable investments already in place.

The scenario would possibly affect other developing countries as they mainly depend on Eurozone countries to finance their expenditures as their budgets are similarly deficits. Donation will possibly decline as such European countries will consider such expenditures as exorbitant. This will likely impact on hostile relations between different regions globally. Overall, economic growth prospects will continue declining.

If European banking will possibly stop lending in their own economies, this will have to result to severe consequences on major Eurozone powers such as Germany and France. [5] This will worsen the crisis as other banks would possibly lower lending to the regions countries. If this, happens the world will risk of the worst ever depression in history. Banks run and panics would spread to other countries. USA will be victim as it largely trades with majority of countries in the Eurozone.

Euro currency will possibly decline in value and will possibly be replaced other emerging strong currencies. Decline Euro Currency will have adverse effects world financial system as the currency is largely used by most countries in Europe. This will worsen the crisis and adversely affect economic prospects in countries affected.

Stakeholders have predicted a possible break of monetary union if quick actions will not be undertaken to counter the existing threats. European Central Bank would possibly reduce support to European banks. [6] The above situation would impact adversely in overall banking system in Europe and lead to a systematic crisis where majority of banks would simply hold the little cash available. The situation might even be worse if other international lending partners would also reduce support to banks in Europe. Such international financial partners include the World Bank and International Monetary Fund (IMF).

This clearly shows that the Eurozone crisis would likely spread to majority of countries if appropriate remedies will be introduced to curb potential adverse effects which might result in future. To counter the existing challenges, it will be prudent for different economic policies introduced to match with the prevailing economic. Sound and realistic policies will have to be introduced. Failure to counter existing deficiencies will keep the world awaiting for yet another severe economic depression. The consequences would all countries as majority of economies are closely related.

Prevailing Economic Conditions and Countering Eurozone Crisis

It is critical to evaluate the current economic environments as it is the major driver of such economic. The current economic environment is difficult though stakeholders are optimistic that the environment is going to improve in foreseeable future. Such economic environment conditions will forced most countries in Europe to begin considering completely overhaul of their economic systems. This will assist in countering threats of re occurrence of yet another economic depression Worldwide.

The prevailing difficult business environment has adversely affected economic growth prospects in majority of countries. This has impacted on declined ability of countries to finance both capital and current expenditures. Slowed economic growth and the corresponding increases in unemployment have impacted on majority of governments spending substantial amounts in addressing the above challenges. This has further made it impossible for majority European countries to survive without borrowing.[7]

The situation will force most European countries to remain innovative in designing and implementation of different policies targeting at boosting overall economic performance amidst the prevailing severe economic environment. Such countries have no other choice than to reduce their huge national debts as a result of borrowing finances at exorbitant interest rates. Financing government expenditures is also becoming difficult. This is both in European countries and also in other continents globally. The situation has impacted on making access to the much needed funds more difficult. NGOs and other organization which largely depend donations have also been affected by the prevailing difficult business environment.

To survive in such a difficult economic environment, European countries have no other option rather than to design viable policies targeting at boosting overall economic growth without increasing their already huge national debts. Increasing the loans is not realistic in the current challenging economic environment as this will simply propel debt burden as result of huge accumulated interest rates. There is need to device alternative strategies which will save the countries from deteriorating economic growth and development in Europe.

If  countries will continue disregarding international agreed by all countries, the situation will be even worse and will severely affect European countries both in the long run and short-run. It is important to realize that most countries are countries are willing to adhere to provision of international treaties, but economic conditions force them to act otherwise. This is a very challenging environment that countries in European region are forced to operate.

To tackle such a adverse economic environment, European countries should invest more on research with the main of identifying possible remedies to the adverse economic environment. This will assist the countries in design of low cost economic development stimulus packages which will impact boosting economic development by a greater extent. This can only be achieved through the company heavily investing in research through relevant ministries in respective countries involved. Being innovative and staying far ahead of other countries in such challenging economic environment are critical skills to survive.

Remaining far ahead of other countries can only be achieved through introduction of new economic development proposals as opposed simply trying to borrow funds to finance unrealistic and non profitable projects. The government should also apply all efforts in reducing huge recurrent expenditures as this simply end up consuming the much needed funds in financing the costly capital investment projects which are more profitable.

Avoiding investing in projects which do not add value to economic growth prospects is a critical option European Countries should use to survive in the current challenging business environment. Projects managers should be hired on contract bases renewable after proven track record. This will bring in more responsibility among those charged with managing economic development projects. More radical policies should be deployed in managing capital intensive to bring in more accountability to those delegated duties.

Process of introducing new economic stimulus packages should be formulated and designed, possible costs to be involved should be calculated in advance. The countries should focus at deploying viable policies as to ensure economic growth prospects are realized with ease. This will save countries involved from incurring the huge losses as a result of implementation of unrealistic economic development projects whose targets are hardly achieved.

Diversifying projects implemented is critical in improving overall economic growth and development. This will assist such governments in ensuring the targeted objectives are achieved disregarding adverse economic happenings in a given sector. This will ensure economic growth prospects are achieved with ease.

International Financial institutions such as the World Bank and the International monetary Fund should stop being silent as world financial stability is being threatened. The European central bank should also play a vital role in stabilizing the Eurozone crisis. This should be through giving valuable financial advices on how the existing dilemma can be resolved. Efforts should also be placed towards ensuring banks are controlled as they play vital in propelling the crisis.

Conclusions

The prevailing Economic environment will even get worse if appropriate actions will not be undertaken to reverse the prevailing trend. Eurozone countries should apply efforts in ensuring budgets prepared are balanced. This will impact on reduced dependency on borrowing to finance exorbitant expenditures. The European central bank should play a vital in ensuring stability in the Eurozone.

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