ECO610 Discussion 1 Week 6 Financial Crisis

World Economic Outlook

Explain what happens to the current accounts of these countries after 2009 during the euro crisis. Analyze two reasons why these countries struggled to provide stability with their financial and monetary systems.

 Current account deficits may be fundamentally justified if net capital inflows promote export capacity and growth. The current account deficit allows for the maintenance of future current account surpluses and the repayment of previous debts. Such a situation is especially pertinent for developing nations with the propensity to converge economically with wealthier countries (Long & Ascent, 2020). Contrarily, debt sustainability can be put at risk owing to well-known rising net foreign debt situations when nations with chronic current account deficits increase spending in response to capital inflows and neglect to promote their export foundation. An enormous trade gap resulting from faster import growth than export growth and deterioration in the primary and secondary income accounts led to an increased deficit.

The two reasons behind the particular countries' struggle in providing financial security and monetary systems were mismanagement of economic liberalization, globalization, and extreme fiscal imbalances. For instance, excessive fiscal imbalances are birthed from extreme risk-taking in a favourable macroeconomic environment. Extensive borrowing by banks and investors also allows for a global financial crisis (Long & Ascent, 2020). When a nation is affected by such a crisis, the economy and economic systems are affected some effects are profoundly rooted and felt. For example, a country will likely experience reduced capital flows, directly impacting its economy. Additionally, a shaken economy means a decline in investments, exports, and domestic production. For the countries; Spain, Greece, and Italy, the recovery of the international financial markets in 2009 during its second quarter end.

Reference

Long, A., & Ascent, D. (2020). World economic outlook. International Monetary Fund.