Discuss the impact of the Euro crisis on investments, capital raising and exchange rates of the major currencies.
Impact on investments
The euro crisis not only gave the EU government so big pressure, but also hit the confidence of these investors heavily in this region (Arezki et al. 2011).
To begin with, as some research told us, the confidence business for investors in the Euro region dropped sharply reaching to -7.1 in 2011. The lack of confidence in investment reflected both from the domestic investors and international investors. The investment of the euro for instance, has been received a cold treatment, to which most of the investors hold an alert attitudes that any fluctuation may result in the withdrawing from this market. And in the property market, the situation is also not so optimistic. The property price lost the robust growth potential which is in a sluggish position and the property market lost its attractiveness for consumers. Such kind of sluggish investment situation even has a knock on influence on the global market. In China, the property market also received a cold welcome with a large decreasing property price and no confidence of investors. (Arezki et al. 2011)
Next, in the stock market, although these bailout measures have promoted the rebound of the stock price temporarily in chart 1, the situation was alarming. For example, many investors had sold out those potential bonds or shares instead of continuing holding, which resulting in a rise of the price of some junk shares. Such kind of situation made the level on bad bonds of shares in the European market in a historical high level, which made the confidence of many investors in this market hit again. (Arezki et al. 2011)
And then, let’s have a look at the investment sitution of some major european countries. In Germany, the business confidence of people was -53.2, and a large surplus of current account. In fact, this kind of surplus in its currenct count may denote us there is no place for its people to invest under the cirsis period. And in Greece the consumer confidence was about -81, in Spain it was -17, in Portugal, it was -56.8. moreover, the current acccount in these bad influenced EU memmber countries were also negative, which also told us the domestic investors may trasfer their money to other places or markets which they consider safe than the euro region. For instance, according to the survey from Arezki et al. (2011), the money of some investors inflowed to the USD market or some emerging market instead of in the euro region.
Chart 1 Euro stock market
Source: Trade economics
Impact on capital raising
In the aspect of capital raising, we can have a discuss on several aspect. At first, one of the measures adopted by EU to mollify the euro crisis was banks’ recapitalization, which upgrades the risks of the future development for banking system in this region (Higgins 2011). As Higgins (2011) mentioned, there was an additional $ 152.7 billion capital required for banks to raise in European region to prevent the crisis to become worse. While in fact, since the eruption of the euro crisis, the financial system such as the banking system have been in alert that there are any chances for them to have a rest and make some adjustment for themselves. The series of requirements and assistant measures carried out by EU government through the banking system has already increasing the borrowing costs of European banks. For example, the large quantities of distressed sovereign debt, loans exceeding deposits too much and a lack of other financial forms but deposit all made European banks in a dilemma let alone some small banks. In a short word, from the eruption of the euro crisis, there is always the risk for these banks even for those big banks to go bankrupt although the weak government has tries to support these banks. So when the burden for these banks to meet the requirements of increasing capital, the situation becomes worse.
Next, according to Horvath and Huizinga (2011), in the one side, only issuing stock with lowing the share price or reducing lending may become the effective means to raise capital for banks, or else these banks may have to reduce the portfolios about €3 trillion in their loans required by the government, both which may all decrease the total economy output of EU and cause a worst credit crisis even compared to the 2008 to 2009 financial crisis. In short, if the capacity and competitiveness of the European banks to raise capital are decreased and influences, the entire process or capacity of the total EU in raising capital will decrease too.
And then, there may also be the chance for some EU members to break away from this euro union to manage their own business as many economists supposed (Peirce et al. 2011). But if it happens, the situation may not become promising as well. At first, although there are many disadvantages of the common currencies such as the limitation for EU countries to depreciate or appreciate the currency to meet different financial situation, when the crisis occurring, only united together can help these EU members to share the risks and assist each other. So we may infer that if some countries break away from the EU at the crisis time, they may face more though situation particular the capacity of them to raise more capital to meet the euro crisis will decrease to the lowest level and the confidences of these shareholders, investors will also be decreased a lot.
Impact on exchange rates of the major currencies
The euro crisis has great influence on the exchange rates of the major currencies such as US dollar, Euro, Yen and the Chinese RMB (Arezki et al. 2011).
In the aspect of US dollar, although there are many problems faced by America such as the slow economy growth space, high rate of unemployment, stagnant domestic demand and a large amount of sovereign debt, the US dollar is still a strong currency. At first, America has been enjoyed the reputation of the strongest country in economy field till now, whose currency has always been the top reserve currency in the global market. Such kind of strong economy power make the dominant power of US dollar can’t be removed for a long period. Next, the euro crisis makes the euro become very fragile which even depreciated about 2.93% in last year. This situation also makes capital inflow to the market of US dollar market or other safe currency such as Chinese RMB, or the gold market. In short, we may infer that for a long period the dominant position of the USD may not change. (Arezki et al. 2011 & Higgins 2011)
In the field of euro, there are still several uncertain factors. At first, the euro crisis has depreciated this currency. Next, the depreciation of euro has brought the prosperous of export trade for EU that these exported commodities from EU become cheaper than before. Then, there is also some risk for the collapse of euro due to the possibility that some EU member countries may choose to break away from this union. In short, the future of euro is still uncertain, which may depend on the final result whether EU can suffer from this crisis and recover fast. (Arezki et al. 2011 & Higgins 2011)
In the field of Japanese Yen, it is also a stable currency compared to euro. Firstly, the consequences of earthquake and tsunami has brought back a large amount of capital of many big Japanese multinational companies to Japan for rebuilding, which made Yen become the hot money and enjoy a strong appreciation compared to the USD. Next, the weak euro and USD in the present time, there is a move to the Japanese Yen in global market which also bring about the appreciation of Yen. (Arezki et al. 2011 & Higgins 2011)
With reference to the Chinese RMB, many economists have the bold hypothesis that it is an inevitable trend for this currency to become a strong reserve currency in the international market. At first, the euro crisis and the financial pressure from America make the original devaluated Chinese RMB have to appreciate. Although the appreciation of RMB is under the pressure of the USA and euro, the original potential of RMB can’t be ignored either. The wild scope of RMB in the trade affair with many countries by the support from a series of bilateral currency agreements, the relatively steady development of Chinese economy, high interest rate in China compared to American contributing to a large quantity of capital inflowing to China, the strong macro-control of Chinese government on its currency all make the RMB has a great developing potential but a relatively steady growth potential. In a word, it is regarded as a right choice to go to invest Chinese RMB. (Arezki et al. 2011 & Higgins 2011)
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