International business is the multi-lateral trade between different countries across the globe. International trade has various positive and negative effects to the participating countries. For example, in the recent past, the world has been rocked by various financial crises originating from different parts of the world. One of the major financial crises that greatly affected the world of commerce is the Greece debt crisis. In addition, there are other two financial crises that have caused negative impacts in both Europe and America. These crises are Spain and Portugal debt crisis (Duthel, 2011). It is evident that management of debt has been an issue of great concern throughout Europe and the world, at large. This paper will provide details of how these different crises took place and their impact on the world economy, in relation to Europe and United States of America.
Causes of the Crises in the three economies
The Greece Debt crisis is a situation, in which the country has a debt level that is approximately 13% in contrast to their gross domestic product. This serves as a great indicator that Greece is not credit worthy, and it is more likely to default on paying the existing loans that it owes external and internal lenders. As a result, the members of the European Union need to intervene and aid in the recovery process of Greece (Manolopoulos, 2011). The existence of the debt crisis has a negative impact on European economies and other economies across the globe. In order to prevent the impact of the Greece debt, some austerity measures had to be put in place.
Austerity measures were put in place due to the following reasons. Rating Agencies were aiming at making sure that Greece would not be able to secure new credit before paying off the existing debt. Other EU leaders and Germany had successful implementation austerity measures hence the strengthening of their own economies (OECD, 2012). As a result of their success, they wanted Greece to follow suit. Organisation for Economic Cooperation and Development was of the opinion that these measures will lead to the improvement of Greece’s competitiveness in the global market place. The organisation recommended the Greek government to increase their revenues through strengthening their tax collection mechanism. They also encouraged the Greeks to take a hard line measures against tax evaders, and the sale of state owned corporations and assets.
There are three main causes of the Greece Crisis. The first reason is that the Greece crisis commenced with how the country qualified to acquire membership to the euro zone countries. The country qualified to join the countries that use the euro as their official currency in 2001. At the time, Greece had been a member of the European Union for the past twenty years (Rothenhöfer, 2011). However, its annual budget deficit was relatively high thus it was not able to satisfy the criteria of the euro zone Maastricht. During the first three years, Greece benefited from the strength of the euro. This is because it was able to secure loans at lower interest rates as well as there was an increase in investment loans and capital. Greece decided to go public in 2004, on how it was able to meet the Maastricht Criteria. To everybody’s surprise, no sanctions whatsoever were imposed on Greece.
The following are the three major reasons why Greece was not questioned about the malpractice. The first reason is European Union member states were not sure about how exactly they would sanction Greece. Second, majority of the members were of the opinion that if they sanctioned Greece, they would weaken the Euro. Third, Germany and France had increased their levels of spending at the time (OECD, 2001). It is important to take note of the fact that their spending was above the set threshold. Given the aforementioned, if they sanctioned Greece they would be hypocritical. Due to lack of control on the Greece situation, the country’s debt level continued to increase.
The Spanish debt crisis was brought about by issuing of long term debt and more precisely the 40 year long term bonds. The issuance of these debts brought about a situation whereby the market was unsustainable thus leading the crashing of the debt markets. As the debt market collapsed, various major corporations in Spain became bankrupt thus leading to a situation whereby the prevailing levels of unemployment were extremely high. The burst of the housing bubble that existed in Spain between the year 1996 and 2007 made the entire mortgage market in Spain to collapse (Litsas, & Lavdas, 2013). As a result of this, the Spanish economy was characterised by a significant decrease in the prices of property. This was very unfortunate because during the property bubble investors were buying property for almost three or four times of their current market value.
The Portuguese debt crisis was brought about by a situation whereby the government had put in place austerity measures that sought to stabilise the economy. One of the austerity measures that were put in place by the government was the cutting down in government spending (Rothenhöfer, 2011). This is a situation whereby, the government would look for ways of reducing the government expenditure. The court of Portugal ruled out four of the nine austerity measures that had been put in place by the government. It is imperative to take note of the fact that, this austerity measures were being put in place in order to facilitate Portugal to recover from the economic challenges that it has been facing for the past two years.
Impact of the debt crisis on Spain, Greece, and Portugal economies
The economies of these three countries are experiencing a lot of difficulties. This is attributed to the fact that the nations are experiencing very high levels of debt. The high levels of debt have been accumulated over a period of approximately a decade. These levels of debt were accumulated, as a result of poor management of public debt (Litsas, & Lavdas, 2013). The governor of the national Federal Reserve used to finance the debt that Greece had secured through additional borrowing. This strategy was not effective because it only served as a temporary solution for what seem to be a permanent problem. It was evident that Greece was not able to be self sufficient, and this is because their economy always operated on a budget deficit. The best way that Greece would have enhanced their financial position is by increasing their sources of incomes. The only way through which this nation would increase it sources of income is through investing in revenue generating assets.
As a result of heavily relying on debt to finance the economy, the three economies have been on their knees in the recent past. The economy is experiencing high levels of inflation. This means that the price of services and goods in the country has been increasing rapidly. This has made most of the products unaffordable to the majority of the citizens. The economy is also experiencing one of the highest levels of unemployment in the world (Manolopoulos, 2011). This result from the fact that, the government rarely hired personnel, and also it embarked on processes of restructuring that has rendered many people jobless. Another reason as to why there are high levels of unemployment that are prevailing in these three countries is because most of the international companies have closed their operations in the country. The small businesses are also struggling to make ends meets.
The prevailing economic situation in the three European countries has resulted in a situation, in which majority of the citizens are under high levels of stress. This has caused many citizens to end up destroying their marriages and consequently their families. Most people are not able to settle down, and this is mainly because they cannot afford the basic life necessities (Duthel, 2011). There are quite a number of instances whereby people have ended up taking away their own life. The prevailing rate of suicide in these three countries is very high. Majority of the people are living in dilapidated conditions, and this reflects the prevailing economic situation in the country.
Impact of the crises in Europe, America, and other parts of the World
In the recent history, the hospitality sector in Europe is experiencing a myriad of challenges. These challenges are as a result of the recent Greece Debt Crisis. One of the sectors in the hospitality industry that has been affected is the aviation industry. This is industry has undergone a lot of cost cutting measures in order to increase consumer demand. During and after the two crises, the aviation industry in the Europe has witnessed a significant decline in the number of passengers travelling to and from the country (Stein, 2012). This decline is largely associated with the levels of unemployment that is being experienced in most economies as a result of the two crises. This has significantly affected the number of people that can be able to afford to travel either for business or for pleasure. Organisations have also been reluctant to sending their employees abroad for training and development and instead they prefer having the trainers come to their offices. This is because the organisations find it more cost effective to pay for the transportation of a few trainers compared to that of an entire department or heads of department.
In order to raise the level of demand by the consumer, most of the airline companies have embarked in serious efforts that are aimed at enticing customers. Most of the airline companies have increased their advertising and marketing budgets. These are efforts that are aimed at increasing awareness about the products as well as making sure that most people are enticed to make travel arrangements with them (Duthel, 2011). Most of the airline companies are also offering tickets at discounted prices in order to stimulate demand in the industry. There has been rigorous competition between the major airlines and the other airlines. This is because the other airlines have been realizing an increase in consumer demand.
This is largely attributed to their airfares, which are deemed to be relatively lower as compared to those of other major airlines. These airlines have been able to lower their ticket prices, to ensure that they attract and retain most of the customers. The major airlines have been facing a lot of challenges especially with the reduction in air ticket prices. This is because their operational costs are higher than those of the smaller airlines. As a result of this, they cannot be able to lower their air fares very much as this can make them realise losses.
During the Greece Debt Crisis, there have been a lot of changes in the hospitality industry as far as accommodations are concerned. Most the hotels that target premium customers have not lost their market share. This is largely attributable to the large sums of disposable incomes that persons within their target market have. The high end markets mostly target multi millionaires and billionaires (OECD, 2012). These are a specific class of people, who are not usually hit very hard during recessions compared to the low income earners. Most of the people within his particular class are individuals that own a business or multiple businesses. They have been able to diversify their investments thus they are able to minimise the impact that the recession has on their incomes.
Hotels that target low end customers have been able to witness a slight increase in their market share. This is largely attributed to the loss of customers by the three star hotels to the budget hotels. Three star hotels usually target middle income earners. Middle income earners in most cases are people that are in middle management positions. During the two recessions, the levels of income of the middle income earners declined. This necessitated most of them to reduce on their levels spending, due to the decline in disposable income (Litsas, & Lavdas, 2013). This consequently made a majority of the middle income earners prefer being accommodated in budget hotels as opposed to three star hotels. This is due to the fact that, three star hotels are relatively expensive compared to the budget hotels. However, their services are slightly different compared to those of budget hotels. The middle income earners felt that they could do without the luxuries of a three star hotel for a temporary basis before the recession is over.
Foreign exchange is the trading of currencies within the currencies market. In this market, stakeholders take part in the selling and buying of currencies. It is upon this platform that the value of all the currencies in is the world determined. The determination of currencies across the world is based on the dollar or the sterling pound. Initially the value of currencies was determined based on the value of gold (Stein, 2012). This is form of valuation was known as the gold standard.
The foreign exchange market facilitates the transfer of purchasing power from one political economy to another. This takes place in order to facilitate trade to be conducted between two countries (Rothenhöfer, 2011). For a party to procure goods in another country, one is required to present the currency of the selling country. The foreign exchange market is, therefore, put in place in order to ensure an efficient exchange of currencies between buyers and sellers. The second is to enable the minimization of foreign exchange risks. The foreign exchange market also facilitates the provision of credit for the purpose of engaging in foreign trade.
Most of the American banks and European banks are indirectly and directly integrated. As a result, when a European bank is experiencing the debt crisis also the American banks will directly or indirectly go through the same. This will negatively impact on the ability of the bank to make profits, as well as the ability of the bank to create funds for the purposes of lending parties that are willing to take loans (Stein, 2012). The United States of America widely engages in trade with European countries. With the prevalence of the debt crisis, there will be a decline in the number of exports that are made to Europe. This will be as a result of one main factor, and that is the decline in value of the euro. When there is a decline in value of the euro, Europeans are not able to procure as many commodities as before the crisis. This is because the euro has lost it value hence leading to a decline in its purchasing power.
The American economy will also be affected due to the amount of investments that it has made in Europe. The American government has made a lot of investments in Europe both directly and indirectly. It has made investment directly as a government and indirectly through its citizens (Litsas, & Lavdas, 2013). Their investments in Europe will most likely be negatively affected by the debt crisis. This will lead to a decline in the level of profits that are repatriated to the United States of America. This will consequently reduce the gross domestic product during that fiscal year.
Multinational corporation is an organisation that has operation in more than one country. The manner in which multinational corporations engage in trade is different from the approach used by domestic corporations. For a multinational corporation that is engaging in business transactions with another business that is located in a foreign country, it has to take into account various aspects in the course of the dealing (Duthel, 2011). Unlike a domestic corporation, a multination corporation is highly susceptible to foreign exchange risks. This is because its raw materials are originating from a different country than where they will be processed. After processing the goods are packaged and exported to the consumer who might be located in a different country.
In such a scenario, the multinational corporation has to convert its currency at least three times. The first instance is during acquisition of raw materials. The second instance is during exporting, processing of the raw materials, and packaging of the finished products. The third instance is when receiving payment from the consumer (Duthel, 2011). A domestic company may only encounter foreign exchange risk only once and that is at the time of receiving payment for the finished product.
According to the article ‘Global Realignment Sparks Revival in Foreign-Exchange Market’ the global foreign exchange market experienced a decline in transactions during the year 2012. This was recorded as the largest reduction in the level of currencies traded since the global financial crisis that took place between the years 2007 and 2008. The reduction in the volume of currencies bought and sold was attributed to the economic crisis that was being experienced in the Euro zone. However, in the present year the dollar and the euro have been recorded to be the most traded currencies. It has also been noted that there was a significant depreciation of the Japanese yen and this was largely attributed to the pressure exerted on central bank by the prime minister. He insisted that the central bank formulate and practice more aggressive practices and policies, in the foreign exchange market (Manolopoulos, 2011). It is search interference from the government that led to the significant decline in value of the Japanese yen. The article notes that the euro, dollar, and yen account for forty five percent of all the trade in the currency market. The weakening of the Japanese yen has prompted a lot of criticism from the international community. This is because the move is seen as one that was targeting at reducing the value of the yen in order for Japan to be more competitive in the import and export market. The Deutsche Bank which is the largest bank with regard to foreign exchange claims that in the past month it has witnessed a significant rise in currency trading.
In conclusion, Greece, Spain and Portugal participation in the international trade and especially their participation in the euro zone has led to poor financial performance, which has led to the financial crises in the countries. This has been due to the effect of the exchange rate, and poor policy formulation and implementation by the governments. In addition, the global financial crisis that primarily affected United States, Europe and the whole world at large also had dire impact on these countries financial performance. The countries need to adopt a long term solutions to their financial problems, which will lead to long term solutions.
References
Duthel, H. (2011). European Debt Crisis 2011. London: IAC.
Manolopoulos, J. (2011). Greece's 'Odious' Debt. Wembley: Wembleydon Publishing.
OECD. (2012). OECD Economic Surveys: Spain 2012. Madrid: OECD.
OECD;. (2001). The DAC Journal Portugal, Belgium Volume 2 Issue 2: Portugal , Issue 2. London: OECD.
Rothenhöfer, M. (2011). Greek Debt Crisis: Background and Possible Improvements. Berlin: GRIN.
Stein, J. L. (2012). Stochastic Optimal Control and the U. S. Financial Debt Crisis. New York: Springer.
V., D., Litsas, S. N., & Lavdas, K. A. (2013). Stateness and Sovereign Debt. New York: Lexington.
