The European Politics Blog

The Federal Reserve introduced a new round of quantitative easing in July last year, which to simplify is basically printing money to purchase bonds, and promised to continue purchasing assets until unemployment in America has reduced. Several other central banks have stepped up efforts as well to prevent currencies from rising and all this financial activity has increased share prices.

Global growth has slowed down the last few months to its weakest level since the 2009 recession. American output is growing at less than 2 percent, while growth in China has reduced to about 7 percent. The fiscal cliff in America came into effect early this year and is singularly worth about 5 percent of GDP; it could potentially send the world economy into recession once more.

Economic reform in China has slowed down as well, with little effort being put into speeding up the shift from a predominantly export-chaperoned economy. On a more positive note, Mexico seems to have a labour market overhaul in the works, while Brazil is working towards curbing its payroll taxes to spurn on more growth.

Historically, countries tend to desire a strong and stable currency, in stark contrast to how content many countries seem to be nowadays for their currencies to depreciate, in the wake of the global financial crisis. The gold standard and the Bretton Woods system era saw government going to great lengths to maintain stable exchange-rates, even though the interest rates required to do so sometimes caused economic downturns.

When currencies depreciate, exporters gain market share and monetary conditions are loosened. Furthermore, it helps to prevent exporters from going bankrupt and not give rise to deflation and falling incomes at home with the aid of downgraded import prices in place.

During the early years of the financial crisis, traders took an exclusive interest in the Swiss franc, which in comparison to the Euro’s hardships and all the money-printing ventures of America seemed much safer. However, this has eventually led the Swiss National Bank to cap the value of the currency at SFr1.20 to the Euro and create francs as per need.

A country restricting currency appreciation influences economic policies of other countries as traders turn to them for financial interests. Raising a currency is quite difficult because it requires a central bank to use up limited foreign exchange reserves but it does stir up market confidence for the nation.

Perhaps more thought should be given to the effect domestic economic policies are having on the global economic crisis and countries should work towards increasing confidence in their economies because apart from bettering market performances, it would lead to more investments at home as well.

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