GLOBAL FINANCIAL CRISIS
The current global financial crisis has impacted Europe, China and India in unique ways. Europe is suffering from the threat to the existence of the Euro zone, protectionism and fear of other industries becoming reliant on bailing out in case of any financial crisis. Apart from these economic impacts, there are other impacts which include the threat to the environmental policy on greenhouse gas emissions and strained relations with neighbouring countries. China has faced the threat of its foreign reserves losing purchasing power due to devaluation of the US treasury bonds and the decrease in external demand lowers its economic growth. Finally, India has a policy approach that shields it from the global financial crisis as it has not fully globalized its domestic financial market.
An analysis of the reaction of these three countries to the global financial crisis reveals that Europe had the poorest response and did not respond in a timely manner. The governments had left the monetary authorities to deal with the problem on their own and only when they intervened did the interbank lending rate reduced indicating renewed confidence in the financial system. Chinas Government responded effectively with expansionary stimulus packages to boost short term economic growth while India needed not react because the impact of the financial crisis was insignificant.
Introduction
The global financial crisis has been seen to impact countries in a unique manner depending on the economic conditions faced by a country. Majority of existing literature on the impact of the global financial crisis, for example, has broadly categorized it into impact on developed and developing countries. Each country however have its own unique characteristics hence analyzing the impact based on particular countries provides conclusive inferences as compared to generalization. For the purpose of this essay, emphasis will be on Europe, China and India with particular reference to how the global financial crisis has impacted them and their reaction. The essay is divided into three sections the first one analyzing the impact of the crisis on each country followed by a section analyzing the reaction of each of the three countries and finally the third section concludes.
Impact of Global Financial Crisis on Europe, China and India
According to the Centre for European Reform (2008), not only has the crisis affected the immediate economic stance of Europe but also other areas such as trade, financial and accounting regulation, economic reform and the prospects of the Euro. There are a number of consequences of the financial crisis that have continued to haunt Europe.
To begin with, it has threatened the very existence of the Euro zone as a result of the persistent banking crisis as well as decreased economic growth rate. Secondly, Europe is under a lot of pressure to embrace protectionist policies so as to shield themselves from such future happenings and finally there is fear that other industries other than the banking sector will have greater expectations of being bailed out in the event that they are involved in a financial crisis.
There however are other aspects that are affected that are not economic in nature for example the relation strain that is apparent between the EU and other states such as the US and Russia. There is also the environmental impact which jeopardizes the going green campaign that requires cutting back on greenhouse gas emissions yet more production is required.
China is the largest and fastest developing country in the world and its economy is export driven. There is therefore no way that it would not be affected by the financial crisis. The impact of the global financial crisis was however slight as compared to other developing countries. Firstly, the US banking crisis was threatening to weaken the Chinese foreign exchange reserve in bonds as most of them were denominated in US dollars. The proposed demotion of US treasury bonds would see Chinas foreign exchange reserve lose global purchasing power (Ming 2009).
Secondly, Chinas economy is export driven as it relies on exports to sustain its economic growth. The decreasing external demand for exports was therefore bound to negatively impact Chinas economy. Finally, China was forced to defer or cancel some of its structural adjustment policies so as to protect itself from a reduced economic growth and guarantee sustainable growth (Ming 2009).
India has a policy that is based on the slow and regulated globalization of its domestic financial market. This has enabled them to harness domestic savings and channel it into beneficial exploit. The use of such domestic savings in financing domestic investment also plays a major role in economic growth of India. It is this approach that has shielded India from any significant impact from the global financial crisis (Rakesh 2008).
Reaction to the Global Financial Crisis
Europes reaction to the global financial crisis in my opinion was not rapid enough with most of the blame resting with the governments. Monetary authorities for example the European Central Bank and the Bank of England made concerted efforts to counter the crisis through injection of vast amounts of liquidity in the currency market. It however became apparent that government intervention was inevitable because as much as the actions of the monetary authorities were necessary, it was not sufficient to restore confidence in the financial system.
The European governments responded slowly and did not act in harmony with each other. They acted individually without considering the repercussions to their neighbors and only when faced with the possibility of a total collapse of confidence in the financial system did they collaborate and get a solution that actually reduced the interbank lending rate (Centre for European Reform 2008).
China responded in a swift and informed manner to curb the global financial crisis. China employed expansionary fiscal and monetary packages which included increased government expenditure and tax reduction. The most unique element of this stimulus package was investing in infrastructure including airports, railways and roads which delivers results in a timely manner. The financing of this stimulus package was carried out by the Chinese central government (Rieti 2009). This expansionary stimulus package worked as expected restoring the Chinese economy to steady growth although on a short term level.
The nature of the Indian economy has enabled it to withstand the global financial crisis without being affected much. Its financial system is protected from the new and innovative instruments that have been credited with setting off the economic meltdown (Shradhanjali Sanjukta 2009). India is also endowed with vast reserves of foreign exchange which will enable it to sail through the interference of capital inflows smoothly. The impact of the financial crisis is therefore insignificant in the case of India.
Conclusion
In conclusion, the global financial crisis has had a significant impact on Europe and there is need to review their reaction so as to avert any future crises as well as recover from the current crisis. China has taken timely and effective countermeasures but they still need to review and constantly monitor them to ensure no new risks arise and finally, India so far has had the least impact of the global financial crisis hence should continue implementing the existing approach.