Major Economic Jolts For Economical Uncertainty

Influence of the Bretton Woods Institutions

Describe about the Major Economic Jolts for Economical Uncertainty.

Global economy has come out from the cling of the financial downturn. Since 2008 a phase of financial impasse established its firm over global economy of first world countries confronted the phase of economical uncertainty at a great degree. The emerging situation causes massive job cut and withdrawal of investment worldwide. Fall of the market share deterred many company to opt for the withdrawal from any farther investment. Massive job cut and redundancy become unavoidable eventuality worldwide. Gradual recovery from this downturn was an intense challenges for all the countries specially the developed one. After recovering from that ordeal global economy started to confront a new problem of uncertainty. The concern doesn’t delimit its presence within the periphery of economics it has expanded its presence in the political arena even the question of political orientation also become a plausible issue here. On the issue of global financial stability International Monetary Fund or IMF put stress on successful normalization. In their April financial report IMF has stated that the advanced economies have already overcome the problem and the countries are in the better state than previous time. At the same time IMF has stated the vulnerability of the emerging economies. On the issue of 27^th June Australian financial defined the phase as collapse of ‘Pax Americana’. The question has been raise in the context of ‘Brexit’. British decision to depart from EU has kindle this question and asking for the relevance in the global context (Czarniawska-Joerges, and Sevón, 2005).

Bretton Woods Institutions came into existence after Second World War. This International cooperation among the nation states was the cardinal objective of these institutions. IMF belongs to them. This organization is ready to offer the required support to the state that is suffering for the balance of payment crisis. Global history has witnessed ‘Pax Americana’ as a replacement of ‘Pax Britannia’ that ended in 1914 after commencement of First World War. The time after Second World War can be defined as American century (Layne, 2012). United States took the major responsibility to reconstruct the effected world through the Marshall plan. Marhall plan offers financial support to the effected countries for the reconstruction. Bretton Woods Institutions are the helping hand for the ‘Pax Americana’ peace process. This process opposed any kind of radical development in the global political arena. Tyrannies to terrorism are falling under this criterion. Communism is the recalcitrant of this, opposing totalitarian regime such communism is one of the cardinal trait of ‘Pax Americana’. Bretton Woods systems the product of this peace process. Contemporary global crunch and ‘Brexit’ has been manifested as a plausible threat for it. The robustness of the Bretton Woods system only can offer the required assurance to the global order. In order to judge the effectiveness of this system it is important to point out the performance of IMF as a global economic Salvatore (Korotayev and Tsirel, 2010). In the April report 2015 IMF has declared that developed economies has already been overcome the pang of the global crunch but emerging economies are still in trouble. Some of these countries are suffering for domestic imbalance due to that shock the political atmosphere of those economies are also directly related with that imbalance condition. The process of transmitting shock is continuing to those emerging economies that directly effecting advanced economies, because those countries are the target of that transmission. The influence of globalization is evident to the emerging economies. These countries have exposed themselves to the global economy and encouraging foreign direct investment in their economy is one of the major traits of these countries that is the reason they manifested as more susceptible to the global downturn. Economic vulnerability is getting emerged in this direction. Despite this imbalance IMF is still active to offer needed support to these economies. IMF already sanctioned three trillion dollar over borrowing to these emerging economies. Present crisis pointed out some noticeable gap in the financial architecture in of the advanced economies. Filling up this gap is one of the critical areas of those nations. The deficiency in market liquidity can make market more volatile. IMF report is indicating towards the less resilient status of the market liquidity. IMF emphasised on successful normalization policy for all the effected countries. This process encourages normalization of financial condition and monitory policy according to IMF report the sustainable recovery can be possible due to this. Responsiveness of monitory policies of the key advanced economy is one of the mandatory traits determined by IMF. In the Euro zone banks are offering non performing loan and they are competent enough to tackle those. These are happening to back the policy adopted by the government in this regard. In the referendum of 2016 UK has adopt a clear and decisive stand against their involvement in European Union. The detachment of UK from the union has been defined as ‘Brexit’. Decision of ‘Brexit’ will generate a profound impact in thye economy of that country as well as in the global economy (Reinhart and Rogoff, 2008). The decision is leading UK towards devaluation of the British national currency GBP, (figure 1.1) and also offering instability in the union itself, because as a salient member and second largest economy of EU Great Britain was carrying a conspicuous weight among the whole organization. As an impact of this detachment UK will lose its access to the well defined and organised European market. The investment in that country will gradually face decay.  There will be a possibility of redundancy in the work force of that country. As a fifth largest economy of world UK can generate influence their economic impasse or downturn to the other developed countries. From that point of view it can be said the crisis will be very much associated with the host country and the countries depend up on that nation. The devaluation of GBP will generate impact over the emerging economy in a negative way, because the cost friendly atmosphere of those country helps them to work as service provider for UK it is the reason they are largely depend up on GBP (Oliver and Williams, 2016). But from European perspective it can be said that the devaluation of GBP will help Euro to gain more stability and reliability in the international market. The political crisis may caused by ‘Brexit’ will crisis of that country only rather crisis of world. The issue of Scottish liberation will not generate any impact in global political scenario rather it will be stability issue of that country alone. From that perspective it can be said ‘Brexit’ will never generate any challenge to ‘Pax Americana’. As country Australia can retain usual relation of solidarity with UK and EU.       

Performance of global financial system

 

Figure 1.1

Global financial system incorporates all the elements that facilitates international flow of financial capital that gets involved in investment and financing of trade. International institution, international agreements, and different informal and formal economic players are the part of the system. In the yea of 2007-08 the system encountered a major jolt due to the global financial crisis .After 9/11 attack in WTC global trend of financial integration adopt a new trait, financial integration between developed and emerging economies got intensified. In the year 2009 present global financial system got another major jolt due to the Euro zone crisis. In that year Greece got a deficit of 12.7% of GDP. This deficit exceeded the maximum limit seated by Euro zone that is 3%. The contagious form of the crisis embraces Spain, Portugal, and Italy. In this situation a bailout need to get provided by EU and that amount was 750 billion Euro for all the effected countries. Economics and financial experts advised for political integration of the countries to prevent the aggravation of the situation. ’European financial stability facility’ got emerged due to the crisis as a Salvatore (Crotty, 2009). This organization is committed to provide support service to all the member state to overcome the debt problem. This is a special purpose vehicle or SPV managed by European investment bank. The exact nature of the crisis is very specific. All the countries under the union are not facing the crisis rather it got emerged from the one economy and generate a contagion effect over others states. In contemporary period the issue of ‘Brexit’ generates another concern to the global economy. The concern generated due to the possibility of contagious effect of British detachment over other member states of EU. Euro sceptic in the different countries has defined EU as sinking ship the voice are rising against EU from different corner. The uncertainty is emerging in two different poll at the same time. Devaluation of GBP is making investor deter from invest farther in UK at the same time Euro sceptic move of different member states are also offering concern EU investors. The uncertainty is getting clouded everywhere.

US dollar is in the apex of its performance since last 12 years. Competitiveness of the American product is increasing day by day. Falling of GBP uncertainty of Euro zone political uncertainty in UK is giving more space to USA to show its credibility. Appreciation of US dollar is offering opportunity to the emerging economy and other Asian countries such as Japan is gaining competitive advantage through the foreign exchange reserve (Kilian, 2008). The concern is getting emerge for the raise of China. The country is offering more space to the public enterprises and the demand of the product and service is getting increase to the common mass day by day. The country has the infrastructure to invite investment from the developed nations. But the cardinal issue in this regard is socio political condition of the country. China is governed by autocratic communist government (Epstein, 2005). The country does not offer space for individual freedom and the freedom of speech. The tyrannical attitude of the administration cannot offer any comfort to the individual enterprise. Therefore it can be said that Chinese currency cannot be equivalent to US at any point of time in the near or distant future.  As democratic continent Australia need to maintain good relationship with all the proximate threat, but for tread and commerce it need to put stress on the Euro American atmosphere because ‘Pax Americana’ is ensuring the certitude for western civilization and western value system in the global context.

Reference

Layne, C., 2012. This time it’s real: The end of unipolarity and the Pax Americana. International Studies Quarterly, 56(1), pp.203-213.

Czarniawska-Joerges, B. and Sevón, G. eds., 2005. Global ideas: how ideas, objects and practices travel in a global economy (Vol. 13). Copenhagen Business School Press.

Korotayev, A.V. and Tsirel, S.V., 2010. A spectral analysis of world GDP dynamics: Kondratieff waves, Kuznets swings, Juglar and Kitchin cycles in global economic development, and the 2008–2009 economic crisis. Structure and Dynamics, 4(1).

Reinhart, C.M. and Rogoff, K.S., 2008. Is the 2007 US sub-prime financial crisis so different? An international historical comparison (No. w13761). National Bureau of Economic Research.

Oliver, T. and Williams, M.J., 2016. Special relationships in flux: Brexit and the future of the US–EU and US–UK relationships. International Affairs, 92(3), pp.547-567.

Crotty, J., 2009. Structural causes of the global financial crisis: a critical assessment of the ‘new financial architecture’. Cambridge journal of economics, 33(4), pp.563-580.

Kilian, L., 2008. Exogenous oil supply shocks: how big are they and how much do they matter for the US economy?. The Review of Economics and Statistics, 90(2), pp.216-240.

Epstein, G.A. ed., 20A05. Financialization and the world economy. Edward Elgar Publishing.