Factors of Euro Fall and its Impact on US and Asian Market
Euro is going through a worse phase of its economic life and the problem began with Greece public deficit. Now the situation is even more problematic as crises expanded to Portugal, Ireland, Italy and Spain. There are several reasons for Euro fall and probably institutional defend is poor. Credible institutional defend needed like steps taken for dollar and Yen. Here we will discuss the main factors that have a direct or indirect impact on Euro fall and the impact that it has on Asian and US markets.
Though the crises entered into a worse phase in 2015, we have seen it in 2008, 09 and 12. It means the history is long and blaming Greek for Euro fall is not the one and only reason. Some economist thinks that single currency is the major problem and they held Maastricht Treaty is responsible for Euro fall. They think that the step of the single currency, especially without a prior political union, was the biggest mistake. When the situation was favorable Euro was cheaper so, some countries like Germany expand exports to countries with local currencies i.e. Finland and Netherlands. In this situation, Euro was actually a source of expanding exports. The instability was not perceived and commercial banks accumulate government bonds without setting aside equity capital and make extra profit.
The problem began with 2008 economic crunch and in 2012 we saw a major decline in the Euro. For a short term, it is restored but the instability factor was there. At the beginning of 2015, Euro again showed a negative trend. In the last few months, it reached to its lowest. Finally, the European Central Bank started quantitative easing program that will add $66.3 billion each month to for the next 18 months till September 2016.
In the past few years the globalization has impacted some countries and especially the Eurozone, in the following ways:
- The Eurozone governments are not able to collect tax revenues properly. In today’s Europe, it’s quite easier for large and multinational corporations to escape taxation. There are various organizations that are exempted from taxation. The Greek shipping industry is not taxed as because of the fear that they would move elsewhere. Similarly, some other big organizations with thousands of staff exempted from tax. This exemption is because it’s easy now for everyone to move the business from Europe to Asia or US. So, globalization is one factor of decline in the value of Euro.
- Emerging economies, for example, BRICS threatened competitiveness in the industrial sector. Due to such threats outsourcing from outside the world create challenges for European people and finally job earning move outside Europe. As a result not only there is an increase in unemployment among local masses but also decline in Euro. If cash in the form of earning going out of Europe, it will support other currencies and will decline Euro.
- There were too many expectations from information technologies and advanced technologies but compared to Australia, America, Japan, and India the Eurozone failed to create enough jobs. As a result, unemployment is not yet covered and the labor market is tight especially for the young.
This is the general backdrop. The entire focus is law and order situation. No one is trying to take the responsibility and find out a solution for genuine financial issues. The downward economic trends will have adverse effects if the issue is not resolved on an emergency basis. Over the time, the entire Europe is growing poorer due to poor administration and absence of single point agenda against economic downfall. The slowness of action by the EU will create other problems that will have long lasting effects on the European economy. Forex traders, for example, waiting for even more destructive fall and if that happens, they will become millionaires. As various forex traders hedge against Euro fall so, the net impact will be their profit and decline in Euro.
As Europe is facing the problems of migrants from troubled areas so, addressing this issue is important. Some economists are of the opinion that migrants will have negative impacts on the economy as they are working on lower wages and, as a result, they will pay lower taxes. On the other hand, they claim more benefits. Similarly, the net contribution from migrant women is very less. The only way to increase the net contribution from the migrants is to increase their wages and labor force participation.
Effects on Asian and US Market
The Euro Zone may feel like a strong position regarding finance, but the fluctuation in currency is felt across Asian and US money markets. The fall in Euro have some deep seated affects on currencies of other countries like China, Japan, and US. Countries like Japan and China heavily rely on export and if the Euro is not attractive for them, they will search for new markets. On the other hand, if the currency is stronger one it will be a good choice for developing countries as they rely on import goods.
With strong Euro, it is easier for European traders to make a place in foreign markets and divert cash towards Europe. Again, the entrance of cash currency can give a boost to inflation but it can be counter with an increase in the wage rate. Though the Asian and US markets are performing well due to the current downfall in the Euro there are high expectations from the quantitative easing program. The consistent flow of cash towards European economy will have some positive impact on the Euro. Europe is in need of strong policies regarding import and export. They need to resolve Greece issues as soon as possible and migrants formula to get control over currency fluctuation. There is still scope in Asian and US markets for European traders if they have strong and stable Euro in their pocket instead of current volatile one.