Effect of the Eurozone Today on the Global Financial Markets Term Paper

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Finance

The Effect of the Eurozone Today on Global Financial Markets

Global markets are so intertwined today that what affects one is definitely going to have an impact on another. Case in point, the recent issues in Greece and other European Union (EU) countries have had a global effect and have wrought havoc on the Eurozone. Because if this global connectedness, large banks and organizations like the International Monetary Fund (IMF) are even more important today than they were in the past.

The EU's finances are powered by the countries that have become member nations, but those finances are guarded by the European Central Bank (ECB) and the IMF. The ECB is the institution that is responsible for the Euro, the currency of the EU, and it is also the organization responsible for negotiations regarding the economic difficulties of EU member nations. Since Greece, Spain, Italy and others have had financial problems, the ECB has worked with those countries and the rest of the EU to shore up the damaged economies. Unfortunately, the measures have not worked as well as hoped in all cases and sluggish growth has been the inheritance. However, some of the problems are being resolved.

The larger issue, and the reason for this report, is the fact that the downturns within the Eurozone affect markets all around the world. The sluggish growth of the EU's economy has had adverse effects on global markets, and has caused potential, and essential, investors to shy away in recent weeks as the problems continue. This paper looks at the IMF, EDB and the situation within the Eurozone and examines how markets are affected by the financial difficulties that are occurring and why the Eurozone problem has global effects.

International Monetary Fund

World War II had a devastating effect on the world economy ad especially those countries that were directly affected by the fighting. There was a need to create a global organization which could help member nations both rebuild and sustain their economies, so the International Monetary Fund was born. The IMF is "an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world" (IMF). The IMF works to foster the cooperation and growth that will bolster national economies, but the body can only make suggestions as it has not regulatory power.

The IMF influences the global economy through its member states which includes almost every nation on Earth. Every member state is required to maintain a fund with the IMF whose amount is set by the percentage of the global economy that the nation occupies. For instance, the United States quota is set at 42,122.40 million SDR. The SDR, or special drawing right, is an amount fixed by several key global currencies (IMF). This SDR figure, which is the amount of capital that the U.S. is required to keep in the Fund as a voting member, also gives that member nation so many votes when decisions are being made. Currently, the United States holds 16.75% of the total votes cast on any issue because of the capacity of the U.S. economy and the influence the U.S. economy has on the world markets. The voting power is also set up so that there is a slight bias toward smaller member states as a group. Basically, the quota determines a certain number and percentage of votes (for the U.S. that figure is currently 17.69% (IMF)), but for the larger economies that percentage is reduced through accounting which initially allows that "The number of basic votes attributed to each member is calculated as 5.502% of total votes" as a base and then each member is allowed an one additional vote per 100,000 SDR that it contributes (IMF). Thus, smaller states start on an equal footing with the larger which will reduce the total influence of the larger states.

However, there are issues with the IMF that critics specifically state has to do with the fact that larger nations still have too much voting power; it is said that this is especially true of the United States. Because the U.S. economy is so much larger than any other in the world, the U.S. has more than 10% more votes than any other country (IMF). This means that actions by leaders who have some control over the U.S. economy can adversely affect the financial philosophy of the IMF to too great an extent. An example of the switch in logic from a national outlook to a more global outlook has changed the face of the IMF (IMF). One overriding criticism that countries have of U.S. influence is that states considered close allies of the U.S. also seem to get more favorable terms when negotiating loans (Jensen). This criticism has been denied by both the U.S. And the IMF, but the influence that the U.S. exerts still produces this type of belief.

Nations have also tried to subvert U.S. influence by banding together in coalitions. The European Union does not vote as a bloc, but it is more of an economic union than a political one. Although there are European central courts and other advantages because of the EU, the primary reason the countries came together was to form a partnership that would be strong enough to withstand the influence of the U.S. And emerging economies such as India and China. As a group, the EU nations would form the largest voting bloc within the IMF, but, unfortunately, the member countries of the EU rarely vote as a cohesive unit. But, the enormity of the combined economic force behind the EU member nations is large enough to cause a great amount of global economic turmoil. The Union itself works to control the issues of its member states with its own means though.

European Central Bank

The European Central Bank (ECB) is the central depository of money and financial guardian for the Eurozone. The ECB is one of the most important banking institutions in the world primarily because of the influence it has over the members of the 17 countries of the Eurozone (ECB) which constitutes one of the largest financial regions globally. The bank's website states that "The ECB's main task is to maintain the euro's purchasing power and thus price stability in the euro area" (ECB). The Euro has become one of the most powerful currencies in the world during its short existence because of the financial power behind the note and the management of the ECB.

The ECB is responsible for all of the economic decisions that affect the Euro which means that the bank has a large effect on the status of the world's markets also.

The ECB website sates that

"The three core components of the financial system are markets, institutions and market infrastructures. The latter facilitate the handling of payments and the clearing and settlement of financial instruments…[and] Safe and efficient payment, clearing and settlement systems are of fundamental importance for economic and financial activities, the conduct of monetary policy and the maintenance of financial stability in the euro area."

In this capacity the ECB tries to act as a stabilizing force by recommending action to be taken to help stabilize the European markets and the issues the concern the countries of the Eurozone. And, actually, any decision that the bank makes is central to the financial stability of every member country of the European Union whether that nation is in the Eurozone or not. The chief characteristic mentioned, especially in recent times, may be the settlement function of the ECB because there have been so many unsettling activities by EU members. Because problems occur with EU members, the ECB spreads the responsibility of the problem among the Eurozone members and tries to reach a solution that will resolve the issue, and hopefully strengthen and stabilize the overall EU economy.

Unfortunately, this can pit people of one nation against others because it could mean that the nation stabilized by the ECB and agreements with other member nations will have to sign an agreement that will force draconian financial measures upon the assisted nation. The steps required to secure a loan are given to ensure that the economy of the troubled nation recovers, but that can still mean protests from the people within the country who are most affected by the measures. The ECB does not take into account the methods that the offending government will have to use in order to meet the contingencies of a plan to help lift them out of a crisis, the specifics (such as spending and program cuts) are left to that nation's government. However, the ECB is generally vilified by the citizens of the nation that has to take "austerity measures" (Wearden). Recently such protests have been seen in Greece and Spain due to austerity measures, but also in Germany because of the undo pressure put on that nation's financial system as it seeks to…[continue]

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