Economy Analysis of European Debt Crisis

After global financial tsunami in 2008, governments significantly increased the expenditure to stimulate economy which resulted in financial deficit because fiscal expenditure is much more than revenue. However, the imbalance is temporary. It is able to make ends meet once the economy recovers and the revenue grows.

It will take time to settle the problem of structural deficit. Spending too much is the root of financial deficit. For instance, expenses on pension fund and welfare go up as aging populations increasing, and the government cant make ends meet. This will last long and wont be solved in a short time.

Origins of Crisis in Greece

Structural deficit existed long in European countries because of huge welfare payments, and the situation deteriorated as influenced by the financial tsunami. The EU hasnt carried out its promise to supply emergency assistance to Greece which aggravated market panic that caused by Greek debt crisis.

 Judging by appearance, Greece was crushed by heavy short-term liabilities and huge financial deficit; the basic reason lies in that Greece couldnt keep the rate of interest and exchange rate in line with its own economic needs after joining euro zone, so it indulged in finance. This is the common problem facing economically weak nations (excluding Germany and France) in euro zone and also the origin that will spread the Greek crisis. For this reason, the EU confirmed financial allocation of nearly trillion US dollars to prevent the indebted countries in euro zone from being attacked and to gain time for fiscal consolidation. However, crisis may recur if the gap between strong and weak economy wont be eliminated or narrowed such as Germany should enhance consumer demands and Greece sells more commodities.

 Experience from Asian Financial Crisis to Solve European Debt Crisis

Too much debt leads to financial crisis. Once in a debt trap, no one buys the debenture or high interest should be paid, and a vicious circle will be fromed.

To thoroughly release from the debt crisis, improving GDP and debt-paying ability is of great importance as well as saving costs. Experience from Asian Financial Crisis in 1997 showed that solutions boosted Asia getting through the financial crisis were currency devaluation, active exporting, foreign exchange accumulation, increasing savings in order to mend the debt-paying credit of a nation.

 As for consumers in European countries, devaluation of euro will contribute to exportation for euro zone in spite of the fact that imported goods will be more expensive. At the same time, euro devaluation will make different impacts on countries in euro zone: overheated economy is a risk for Germany who has annual trade surplus reaching hundreds of billion, but France could attract more visitors.

Crisis and Solutions for China Exporters

As euro devaluation helps to expand exportation for the euro zone, China manufacturers also benefit from cheaper components and materials. As for exporters targeted to Europe market, choice between market and gross margin is difficult. However, the manufacturer is less shocked if obtaining production base in Europe.

 So this crisis in euro zone unexpectedly highlighted the importance of extra-regional markets for Europe exportation; correspondingly for Asia export competition, it revealed the significance of dispersion of production bases.

 Euro devaluation triggered by European debt crisis may attract some Asian manufacturers to set up factories in Europe in order to evade customs barrier and exchange rate risk. It is conceivable that the nations in Eastern and Southern Europe where labor costs are inexpensive will be preferred. Our business opportunities lie in manufacturers demands for equipment!

Euro-NTD Exchange Rate Graph in Recent One Month (revaluation of NTD is 7.83%)

Euro-NTD Exchange Rate Graph in Recent Three Months (revaluation of NTD is 10.04%)