What are the crisis affect the economies of country, Macroeconomics

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What are the crisis affect the economies

This crisis would affect the UK in 3 major ways.

First the UK would be unable to sell its exports to these economies if they are heavily indebted. Governments of Portugal, Greece and Ireland have already introduced austerity budgets that have dramatically cut government spending, welfare benefits and public sector wages and increased taxation. This has significantly decreased levels of disposable income for households in these countries. If they have less income they would be unable to afford UK exports that will in turn affect income of British businesses and do little to help British government reduce its large current account deficit.

Second the northern eurozone countries particularly Germany (Extract C, line 6) that has a strong economy and doesn't suffer from excessive debt are supposed to be tipped into recession by problems of the southern nations (the so-called 'Club-Med' countries). This will be especially bad for UK's macroeconomic performance. At present almost 60% of UK's trade is with eurozone countries. Germany is the second biggest export destination after USA. If German economy is pulled into recession and has to bail out southern eurozone economies in order to save the euro it would harm the UK economy. UK exporters will struggle to sell their products in Germany that will in turn harm British growth and unemployment as firms pursue to cut back on production and dismiss workers.

Third if the excessive budget deficits and sovereign debt crisis bring down the eurozone, British government will inevitably be dragged into a financial bailout. In spite of the fact that current Chancellor, George Osborne has resisted all calls for financial support for struggling eurozone economies of Greece and British, Portugal business has strongly integrated trade links with eurozone. Furthermore major British banks have underwritten German and French banks which are heavily exposed to the bad government debt in Portugal and Greece. If the Italian or Spanish banking systems collapse it will create a chain reaction which will have major repercussions in Frankfurt, Paris and London.

 


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