Posts tagged EU

IA Commentary 3

ECONOMICS COMMENTARY COVERSHEET
Economics Commentary Number: 3
Title of extract: European Union and South Korea Sign Free Trade Agreement
Source of extract: International centre for trade and sustainable development. (2010). 14(35), Retrieved from http://ictsd.org/i/news/bridgesweekly/86983
Date of extract: November 4th, 2010
Word Count: 738
Date the commentary was written: November 8th, 2010
Sections of the syllabus to which the commentary relates: Section 4
Section: 4
Candidate Name: Sang Keun Kim
Candidate Number:

International Centre for Trade and Sustainable Development(ICTSD) reported that the European Union and South Korea signed a free trade agreement (FTA) on October 6th, 2010. Free trade agreement is an agreement to form a type of trade bloc between two or more countries to eliminate protectionism barriers such as tariffs and quotas. Tariff is a taxation imposed on any product when it is imported into a country. Also, quotas are limitation set on the number of imported good allowed in the country. In this commentary, the focus will be on the Korean side of the market, not the European market.

ICTSD reports that the FTA agreement will free almost all of the trade and eliminate 99% of European tariffs and 96% of Korean tariffs on imported goods. This elimination of tariffs will help markets between EU and Korea to eliminate dead weight loss, which is a cost caused by economic inefficiency.

By initiating free trade, EU and Korean markets will be able to get rid of the deadweight loss from the tariffs. Deadweight losses are costs that are caused by inefficient industries spending their resources inefficiently, and these costs are often passed on to the consumers. As EU and Korea initiate FTA, the prices of products will decrease from P(tariff) to P(world). Subsequently, the deadweight losses caused by inefficient industries are eliminated, getting rid of the burden off the consumers’ hands.


As EU and Korea get rid of the tariffs, there will be benefits for the consumers for several reasons. According to ICTSD, the Europeans will gain in chemicals, pharmaceutical, electronics, alcoholic beverages, and agricultural sectors. In other words, this means that the Europeans are efficient in these sectors and they have the ability to supply at the price of P(world), which is way cheaper compared to how Korean industries are supplying at P(domestic). Therefore, the Korean consumers benefit from a fall in price from P(domestic) to P(world) in these sectors. Also, the quantity demanded from the Korean consumers will increase from Q1 to Q2 due to its decreased price. So the consumers who could not buy the products from Q1 to Q2 now benefit from the EU-Korea FTA by the decrease in the price of the products. However, this will be especially bad for the Korean industries in these sectors. As it is illustrated in the diagram, their share of the market decreases from Q(domestic) to Q1 due to the EU-Korea FTA.

The efficient industries compared to other countries’ industries will benefit from gain in the share of other countries’ market by the FTA. These industries are most likely that they will not be badly affected by the FTA and will not lose any of the market shares within the domestic market. In the point of view of European industries in chemicals, pharmaceutical, electronics, alcoholic beverages, and agricultural sectors, these industries will not lose any of the market shares from the Korean industries in these sectors due to their competitiveness and efficiency. To illustrate, the Korean industries in these sectors will not be able to take away the European market due to its high price of P(world) compared to European industries’ price of P(domestic). Therefore, the supply curve will be above the equilibrium point and the Korean products in these sectors will not be appealing to the European consumers.

On the other hand, the Korean industries in automobiles, ships, and mobile communications sectors, they will not lose any of the market share from the European industries because of their cheap price of P(domestic) compared to P(world) of European industries.

In conclusion, the EU-Korea FTA will have a great impact and significance to both economies. There would be a losses and wins from both sides. However, the FTA is worth a try due to the elimination of deadweight losses caused by inefficient industries that are causing great burden on consumers. The elimination of deadweight losses mean the elimination of the inefficiency, and this will bolster the industries to be efficient as possible. Thus, this will benefit not only the consumers but also the industries because it will help them to be competitive in the global market. Increase in the competitiveness and efficiency will help the industries to export their goods and gain profit like how the other efficient foreign industries did. Also, the increase in the trade will greatly contribute to subside the ever-rising unemployment rate, which is troubling both the sides.

Word Count: [738 words]

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What Greece must do to Survive the Debt Crisis

A frustrated Greek expressing his angry through violent protest

CNN News: Click Here

In action to fight off the increasingly unbearable debt crisis, Greece chose to get financial support from both EU (mainly Germany) and IMF. This might help Greece out of the problem in a short-run, yet they still have to pay back the money they have borrowed from EU and IMF. Now all Greeks must tighten their belt in order to fight off the crisis. There is a list of what Greece must to do recover their economy.

  1. Salary Cuts
  2. Retirement
  3. Increase in Taxation
  4. Reform in Pension System

First of all, all Greeks (at least public workers) will increase a cut in their salaries. Salaries are one of the big factors that take up large percentage of the cost in business and government spending. Though this will arouse some violent protests from the people, there is no other way to fight off the debt crisis without a cut in wages.

With some cuts in wages, many business and governments will want to minimize the number of employees as possible to decrease the money spent. This will result in early retirement of many workers with ages over 60. This will also contribute to the high unemployment rate, however, significantly cut the unnecessary budgets.

Interestingly, the Greek government decided not to have an early retirement for its workers but to increase the retirement. The retirement age was shifted from 61 to 65. It may be that Greece government didn’t want more unemployment and more protests regarding it. I think that the Greece government is tightening the payment of wages so much that they don’t need to cut down its workforce.

Greek people will most definetly exprience the rise in taxation. Greek government said that it was going to raise all VAT’s by 10%. Increasing taxation is one of the key ways that Greece can endure the crisis.

Greeks will also exprience a cut in pension. Unplanned pension system was the main culprits for the cause of Greece’s debt crisis. The government borrowed money, unplanned, in order to fulfil its populistic policy of pension system. The system supported too many people and gave out excess amount of money. So many aged Greeks will exprience this frustrating cut in their pension.

In sum, these were the actions that Greece must implement in order to survive the debt crisis. I think that the government’s determination to get out of the deb crisis is firm, but I think that this determination is not supported by lots of Greeks. Greek people must bear in mind that if they don’t start tighenting their belts, the government’s effort in order to get out of the crisis.

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Analysis of Greek Economy in Debt Crisis

Probability of  Countries Being Unable to Pay Back Debt

BBC News: Article 1

BBC News: Article 2

European Commission has announced that Greek economy would shrink by 3% this year due to its high risk of defaulting.

As illustrated in the graph, Greek’s probability of defaulting has passed 50% and is heading for 60%. At this rate, Greece will most definitely default if there are no strict cut-offs on government spending and European countries to aid Greece.

Other countries in Eurozone fear for Greek’s economic crisis might affect Eurozone severely. As a result of Greece’s high CDS, it is badly affecting Euro.

“The euro hit its lowest level against the dollar in more than a year, at $1.2887, and was also down against the pound, with one pound worth 1.1706 euros.”

EU economic and monetary affairs commissioner Olli Rehn describes Greek economic crisis as a “bush fire” and that “it must be contained” in order to prevent it to become a “forest fire” putting Eurozone at risk also.

Accordingly, EU and IMF has promised immediate aid and bail-out package for Greece’s debt crisis. However, there are many doubts about how the bailout package could help the Greek crisis.

“The problem is no one has a clear idea of how we’re going to get out of this situation,” said Julian Callow, chief Europe economist at Barclays Capital.

What will happen if Greece defaults? Last post, I have explained about the consequences of defaulting. First, the Greek currency and possibly Euro will experience hyperinflation and it will be a no better than a piece of toilet paper. Second, as the currency Euro is affected, this will affect the taxpayers in the Eurozone, forcing them to carry the some parts of Greek burden. If this is sever enough, it could mean the dissembling of the Eurozone.

So, what are the actions Greece is taking to fight this problem? Well, first is that they have asked help from EU and IMF, which helped them pay their short-run bills. Secondly, they have announced to cut their governmental spending from more than 10% to 3% by 2012.

It was a wise choice to ask for a bailout package, however, if Greece fails to recover from this debt crisis, it means that they’ve just added another debt to their already unbearable- debt list.

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Greek Bonds are Useless Junks says Standard & Poor’s

BBC News: Click Here

According to BBC News, global stock markets tumbled after Greece’s debt was downgraded to “junk” by rating agency Standard & Poor’s over concerns that the country may default.

As uncertainty of whether Greece will get financial support from EU and IMF to clear up its looming debt increases, many rating agency such as Standard & Poor’s has rated Greek bonds as junks, rubbish.

What does it mean when a rating agency says that now Greek bonds are ‘junk’? It means that it is now very risky to invest on. It is mainly because of Greek’s apparent lack of ability to pay its bills. So there is a higher chance that an investor will lose money for investing in a country falling into the abyss of ever increasing debt.

Greece’s finance ministry said in a statement that the downgrade “does not correspond with the real data of the Greek economy.” Greek finance ministry denies that the down-rating doesn’t reflect the real Greek economy, however, this incident showed investor’s distrust toward the Greek economy.

If Greece does not take action to reduce debt and get help from the EU and IMF, it may default.

What’s default and what happens if a country defaults?

Lets look into what the definition of default is. Default is simply announcing that you cannot pay the debt in the due date. It doesn’t mean that the government will go bankrupt and the debt wouldn’t go away. The debt will always be there and the investors/lenders will demand you to repay the debt whenever possible.

What are the consequences of a country defaulting? There are several effects to this. First of all, the currency of the country becomes a rubbish or a paper tower (or no better than a paper tower). Foreign investors will have distrust against the currency of the defaulted country and the value of the currency will drop significantly. As the value of the currency goes down, it makes the imported goods insanely expensive, which will lead to inflation and shortage of necessary goods. If a country has high food dependency on importing, many people will starve to death as there are simply shortage of food due to expensive importing.

People will loose confidence and the recession or more like disintegration of economy will be in a vicious circle. So by this stage, there is ultimately nothing a country can do to recover. So Greece should get help from EU and IMF quickly by giving them confidence that they can pay back the borrowed money.

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