Today (16/6/11) in Greece, the Prime Minister is trying to form a new government that will help the country tackle its large and growing debts. Austerity measures have been put in place by the Greek government and these cuts and subsequent job losses (unemployment now stands at 15.9%) have resulted in massive riots.
Critics of the eurozone and Greek membership are suggesting that the price Greece has to pay to remain a member might be too high. Billions of euros have already been given to the bankrupt country and yet it seems to have made little difference – more money is now needed, but Finance Ministers have so far been unable to agree on how best to finance another bailout. These concerns have adversely affected financial markets, as investors sell their shares in light of the economic concerns surrounding Greece. The trends in financial markets over recent weeks suggest a growing feeling that Greece may default on its debt.
If an agreement isn’t reached between European leaders and/or Greece doesn’t accept the terms, then it could spell even more trouble and not just for the Greek economy and the eurozone. Banks across Europe have lent money to Greece and if an agreement isn’t reached, then this will mean losses for the private sector. Whilst these losses may be manageable, further trouble may arise due to contagion. Other countries with substantial debts, including Spain, Ireland and Portugal could mean a significant increase in these potential losses.
As the crisis in Greece continues, doubts remain over whether the European leaders even know how to deal with the crisis and this creates a lack of confidence in the markets. Activities over the coming weeks will play a large part in the future of Greece’s eurozone membership, trends in financial markets and the direction of the UK economy. The following articles consider Greece’s debt crisis.
Greece debt crisis sends financial markets reeling BBC News (16/6/11)
Euro slumps vs Swissie, Greece intensifies concern Reuters (16/6/11)
EU and IMF agree Greek debt deal Financial Times, Peter Spiegel (16/6/11)
Greece crisis: Commissioners fear ‘future of Eurozone’ BBC News, Joe Lynam (15/6/11)
Stocks slump as Greece crisis turns violent Bloomberg Business Week, Pan Pylas (15/6/11)
Euro slides as Greek default fears deepen Financial Times, Peter Garnham (16/6/11)
Germany insists all of EU must pay for Greece bailout Guardian, Ian Traynor (15/6/11)
US stocks slump on US, Greek woes Associated Press (16/6/11)
More time to argue about Greece BBC News, Stephanie Flanders (16/6/11)
Greece: Eurozone ministers delay decision on vital loan BBC News (20/6/11)
Greece crisis: Revolution in the offing? BBC News, Gavin Hewitt (19/6/11)
Greece crisis: Not Europe’s Lehman (it could be worse) BBC News, Robert Peston (20/6/11)
Greek debt crisis: eurozone ministers delay decision on €12bn lifeline Guardian, Ian Traynor (20/6/11)
Eurozone must act before Greek crisis leads to global meltdown, IMF warns Guardian, Larry Elliott (20/6/11)
Greece: Private-sector voluntary aid may be impossible BBC News, Robert Peston (21/6/11)
Greece crisis and the best way to cook a lobster BBC News, Stephanie Flanders (22/6/11)
Questions
- What is meant by contagion and why is this a potential problem?
- What are the options open to European leaders to finance the bail out?
- If an agreement is not reached or Greece do no accept the terms, how might the UK economy be affected?
- What has been the impact of recent events in Greece and Europe on financial markets and currencies across the world? Explain your answer.
- Why are critics suggesting that the price of Greece remaining in the Eurozone might be too high? If Greece was not a member state what would it mean it could do differently to help it deal with its mounting debts?
The outbreak of E. Coli has already cost lives, but it is also costing livelihoods of farmers who rely on producing and selling agricultural produce. Immediately following the outbreak in Germany, the blame was put on Spanish producers of cucumbers, which lead to the destruction of tens of thousands of kilos of fresh produce, costing Spain an estimated £177m per week in sales. Although Spain is not the source of the outbreak, the problem has not disappeared and will now affect the whole of Europe: at least until the source is identified. Countries such as Spain, France and Germany are big exporters to Russia and these countries are likely to take a big hit with the Russian health service banning imports of EU vegetables. The impact of this action (together with other countries implementing similar strategies) has not only affected agricultural producers, but is also having wider impacts on other sectors, including transportation. If no-one wants to buy the products, there’s very little use for the companies and indeed drivers to deliver them.
The Spanish economy will be looking for compensation from Germany for the losses they incurred, when sales of fruit and vegetables practically ceased following Germany’s initial accusation. As the Spanish Prime Minister Zapatero said:
“We acted as we had to, and we are going to get reparations and the return of Spanish products to their rightful place. … I believe that any other interpretation or any effort to politicise the huge mistake made by the German authorities is totally unfair.”
The effects of this outbreak have spread to UK supermarkets and producers. The former have reported a slight drop in sales of fruit and vegetables, but have not taken this opportunity to drop the prices paid to British growers, which is particularly important for cucumber producers, given the high production costs. Sarah Pettitt of the National Farmers Union said she was ‘extremely encouraged to hear that the major supermarkets … are not using this unfortunate situation as an excuse to drop prices to British growers.’ In fact some believe that the outbreak could be good for UK producers, as consumers increasingly turn to home-produced products. While the source of the outbreak remains unknown, so does the future of agricultural producers throughout Europe, as well as all those that have any dependence on this huge industry.
E. Coli outbreak: UK cases rise to 11 BBC News (4/6/11)
E coli source hunted as growers fear sales slump Guardian, Robin McKie (4/6/11)
Farmers reel as outbreak hits demand Financial Times, Matt Steinglass and Victor Mallet (3/6/11)
Spain seeks compensation for E. Coli blame BBC News (3/6/11)
E.Coli: Economic impact on the agriculture industry BBC News, Richard Anderson (3/6/11)
Spain says Germany mulls EU aid over cucumber slur Associated Press (3/6/11)
Rose Prince: Cucumbers, diet and Prof Moth Telegraph, Rose Prince (4/6/11)
Questions
- Why have cucumber producers been experiencing falling profit margins in recent years?
- Could the outbreak of E Coli bring any benefits to the UK economy?
- What are the costs and benefits to Russian consumers and producers from the protectionists measures that have been imposed on EU imports of fruit and vegetables?
- Which sectors within the European market are likely to experience the biggest problems?
- Explain why the Chairman of the National Farmers Union was ‘encouraged to hear that the major supermarkets … are not using this unfortunate situation as an excuse to drop prices to British growers’. Why would supermarkets have an incentive to do this?
The world’s population is set to go on rising – at least to 2050. And as population rises, so will the demand for food. But here we come up against a potentially catastrophic illustration of the law of diminishing returns. Population is set to grow, but the world supply of land is pretty well fixed. And with global warming, some land may become unusable.
According to Sir John Beddington, an expert in population biology and lead author of a government-commissioned report, The Future of Food and Farming, there could be serious consequences of this population rise, including rapid rises in the demand for food, rising food prices, rising land prices, the degradation of land, growing food poverty in many developing countries, growing political unrest and serious environmental damage. As the report’s Executive Summary states:
The global food system will experience an unprecedented confluence of pressures over the next 40 years. On the demand side, global population size will increase from nearly seven billion today to eight billion by 2030, and probably to over nine billion by 2050; many people are likely to be wealthier, creating demand for a more varied, high-quality diet requiring additional resources to produce. On the production side, competition for land, water and energy will intensify, while the effects of climate change will become increasingly apparent. The need to reduce greenhouse gas emissions and adapt to a changing climate will become imperative. Over this period globalisation will continue, exposing the food system to novel economic and political pressures.
Any one of these pressures (‘drivers of change’) would present substantial challenges to food security; together they constitute a major threat that requires a strategic reappraisal of how the world is fed.
The report specifically looks at five key challenges for the future:
A. Balancing future demand and supply sustainably – to ensure that food supplies are affordable.
B. Ensuring that there is adequate stability in food prices – and protecting the most vulnerable from the volatility that does occur.
C. Achieving global access to food and ending hunger – this recognises that producing enough food in the world so that everyone can potentially be fed is not the same thing as ensuring food security for all.
D. Managing the contribution of the food system to the mitigation of climate change.
E. Maintaining biodiversity and ecosystem services while feeding the world.
So what can be done and how realistic are the policy solutions? The following broadcasts and articles examine the arguments
Webcasts and podcasts
Articles
Report
Questions
- Summarise the main findings of the report.
- Does increasing the output of food per agricultural worker contradict the law of diminishing returns? Explain.
- What are the current failings of the system of global food supply?
- Why are problems of food supply likely to intensify?
- What externalities are involved in global food production? What impact do these have?
- In what ways might the externalities be internalised?
- What are the benefits and dangers of new technologies as means of increasing food supply?
- To what extent do the goals of increasing food supply and environmental sustainability conflict with each other?
- Explain the main drivers of change that affect food supply and demand? In what ways do these drivers interact with each other?
- “Although the challenges are enormous there are real grounds for optimism.” Explain the report’s authors’ thinking here.
It doesn’t seem that long ago when Greece was in the news regarding its deficit and need for bailing out. Back then, countries such as Spain, Portugal and Ireland were being mentioned as the next countries which might require financial assistance from the EU. It is now the Irish economy that is in trouble, even though the Irish government has not yet requested any financial help. The EU, however, is ‘ready to act’.
The Irish economy experienced an extremely strong boom, but they also suffered from the biggest recession in the developed world, with national income falling by over 20% since 2007. Savers are withdrawing their money; property prices continue to collapse; and banks needed bailing out. Austerity measures have already been implemented – tax rises and spending cuts equal to 5% of GDP took place, but it has still not been enough to stabilise the economy’s finances. All of these problems have contributed to a large and unsustainable budget deficit and a significant lack of funding and that’s where the EU and possibly the IMF come in.
If the Irish economy continues to decline and experiences a financial crisis, the UK would probably be one of the first to step in and offer finance. As our closest neighbour and an important trading partner, the collapse of the Irish economy would adversely affect the UK. A significant proportion of our exports go to the Irish economy and, with Irish taxpayers facing troubled times, UK exporting companies may be the ones to suffer.
One thing that this crisis has done is to provide eurosceptics with an opportunity to argue their case and blame the euro for the collapse of Ireland. With one monetary policy, the Irish economy is tied in to the interest rates set by the ECB and low interest rates fuelled the then booming economy. The common currency also increased capital flows from central European countries, such as Germany, to peripheral countries, such as Ireland, Spain and Portugal. In themselves, capital flows aren’t a problem, but when they are used to fund property bubbles and not productive investments, adverse effects are inevitable, as Ireland found to its detriment.
As prices collapsed and banks simply ran out of money, the government stepped in and rescued not only the depositors of Irish banks, but also their bondholders. Unable to devalue their currency, as it’s the euro, the Irish economy was unable to boost exports and hence aggregate demand and in turn economic growth. Although, the Irish government has not requested any financial help, as the French Finance Minister commented about a potential bailout: “Is it six months or a few days away? I’d say it’s closer to days.” The following articles look at this developing situation in Europe.
EU plays down Irish republic bail-out talks BBC News (17/11/10)
Ireland bailout: the European politicians who will decide Telegraph, Phillip Aldrick (17/11/10)
Don’t blame the Euro for Ireland’s mess Financial Times, Phillipe Legrain (17/11/10)
Britain signals intention to help Ireland in debt crisis New York Times, James Kanter and Steven Erlanger (17/11/10)
Ireland will take aid if ‘bank issue is too big’ Irish Times, Jason Michael (17/11/10)
Irish junior party says partnership strained Reuters (17/11/10)
Ireland resists humiliating bail-out as UK pledges £7 billion Telegraph, Bruno Waterfield (17/11/10)
Markets stable as Ireland bailout looms Associated Press (17/11/10)
The implausible in pursuit of the indefensible? BBC News blogs, Stephanomics, Stephanie Flanders (16/11/10)
Ireland bailout worth ‘tens of billions’ of euros, says central bank governor Guardian, Julia Kollewe and Lisa O’Carroll (18/11/10)
The stages of Ireland’s grief BBC News blogs, Stephanomics, Stephanie Flanders (18/11/10)
Q&A: Irish Republic finances BBC News (19/11/10)
Could Spain and Portugal be next to accept bail-outs? BBC News, Gavin Hewitt (19/11/10)
Questions
- Why will the UK be affected by the collapse of the Irish economy?
- If Ireland were not a member of the eurozone, would the country be any better off? How might a floating exchange rate boost growth?
- The Financial Times article talks about the euro not being to blame for the Irish problems, saying that ‘tight fiscal policy’ should have been used. What does this mean?
- Why is the housing market so important to any nation?
- What are the arguments (a) for and (b) against the euro? Would Ireland benefit from leaving the euro?
- Should the UK government intervene to help Ireland? What are the key factors that will influence this decision? What about the EU – should Ireland ask for help? Should the EU give help?
- Austerity measures have already been implemented, but what other actions could the Irish economy take to increase competitiveness?
The possibility of currency and trade wars and how to avert them were major topics at the G20 meeting in Seoul on 11 and 12 November 2010. Some countries, such as the USA and the UK have been running large current account deficits. Others, such as China, Germany and Japan have been running large current account surpluses. But balance of payments accounts must balance. Thus there have been equal and opposite imbalances on the financial plus capital accounts. Large amounts of finance and capital have flowed from the trade-surplus to the trade-deficit countries. In particular China holds a vast amount of US dollar assets: a debt for the USA.
The trade and finance imbalances are linked to exchange rates. The USA has accused China of keeping its exchange rate artificially low, which boosts Chinese exports and further exacerbates the trade and finance imbalances. The USA is keen to see an appreciation of the Chinese yuan (also known as the renminbi). The Chinese response is that the USA is asking China to take medicine to cure America’s disease.
So was the meeting in Seoul successful in achieving a global response to trade and exchange rate problems? Has it averted currency and trade wars? Or were national interests preventing a concrete agreement? The articles look at the outcomes of the talks.
Articles
G20 pledge to avoid currency war gets lukewarm reception Guardian, Phillip Inman and Patrick Wintour (12/11/10)
G20 fails to agree on trade and currencies Financial Times, Chris Giles, Alan Beattie and Christian Oliver (12/11/10)
Main points of the G20 Seoul summit document Reuters (12/11/10)
Factbox: Outcome of the Seoul G20 summit Reuters (12/11/10)
No deal: Seoul’s G20 summit fails to deliver on currencies, trade imbalances The Australian, Laurence Norman and Ian Talley, Dow Jones Newswires (12/11/10)
G20 to tackle US-China currency concerns BBC News (12/11/10)
The expectations game BBC News blogs: Stephanomics, Stephanie Flanders (12/11/10)
Obama: Imbalances threaten growth BBC News (12/11/10)
Obama leaves G-20 empty-handed on currency spat msnbc (12/11/10)
The ghost at the feast The Economist, Newsbook blog (12/11/10)
Forget summit failures, look at G20 record Financial Times, Christian Oliver, Chris Giles and Alan Beattie (12/11/10)
Obama warns nations not to rely on exports to US BBC News (13/11/12)
G20 summit distracted by ‘currency wars’ Guardian, Mark Weisbrot (12/11/10)
Current account targets are a way back to the future Financial Times podcasts, Martin Wolf (2/11/10) (Click here for transcript)
Ben Bernanke hits back at Fed critics BBC News (19/11/10)
Why should you care about currency wars? BBC News, Stephanie Flanders (9/11/10)
G20 sites
G20 Korea, home page
Korean G20 site
2010 G-20 Seoul summit Wikipedia
Questions
- What are the causes of the large trade imbalances in the world?
- What problems arise from large trade imbalances?
- What is meant by beggar-my-neighbour policies?
- Are moves towards freer trade a zero-sum game? Explain.
- Are moves towards protectionism a zero-sum game? Explain.
- Are attempts to get a realignment of currencies a zero-sum game? Explain.
- How successful has the G20 been over the past two or three years?
- Would it be desirable for governments to pursue current account targets?