Thank You

Dear followers,

It has been a long time since I posted anything here and I'm sorry to say that I'm not sure I will upload the frog's equation anytime soon. As some of you may know, I recently got the opportunity to continue my studies in Singapore, and am now in the midst of my International Baccalaureate there. As this programme is somewhat more demanding, I sadly find that I have little time and energy left to dedicate to this blog, and that my interest for economics is satisfied through actual economics classes that I am taking. Maybe, if circumstances allow it, I will start posting again sometime in the future. For now, I just want to thank all of you for making this journey interesting and exciting, for sharing your opinions, and most of all for giving a young amateur the chance to satisfy her curiosity and learn about economics in a fun way.

Eurocrisis

For some months now there have been worries and discussions about Europe’s economy.  More and more countries are going into heavy debt crises and now it’s not only Greece that’s in problems, but larger countries like Spain and Italy are also becoming problematic. Debts are soaring and talks about bailouts and ways to reboot the economy are taking place non-stop.

To add to this situation, the German economic figures have been published and show that Germany, that seemed to be the one country holding on quite well, is actually not doing as well as expected.

Between April and June growth in the German economy slowed noticeably; it grew by just 0.1% according to the national statistics office. This shows that even though Germany has been driving recovery in the Eurozone, it is actually not as strong as it may seem, and this can cause many problems if further bailouts of European countries are needed. In general, the economic growth in the Eurozone has fallen from 0.8% to 0.2% in the last quarter, which reflects the state that our economy is in.

Angela Merkel and Nicolas Sarkozy have been meeting up regularly in the post weeks to try to find a solution to the Eurozone debt crisis. There have been rumours about discussions regarding the introduction of Eurobonds. These would be bonds backed by the whole euro block rather than individual countries and might be helpful to push the economy up again. However, both the French and German have said that Eurobonds are not an option at the moment and will not be discussed in the crunch talks.

Agricultural subsidies

Agricultural subsidies are amounts of money given to farmers to support their operations.

Subsidies may be provided directly, as cash payments, or as indirect support.

For example, a government might provide low-cost crop insurance, keep prices at an artificial level, or assist farmers in other ways. Agricultural subsidies are a feature of many government budgets, and a topic of hot debate in some regions of the world.

In the case of a positive agricultural subsidy, a farmer is rewarded for growing a crop, with the subsidy usually being based on the amount of crop being grown, or the amount of the harvest.

With negative subsidies, farmers are encouraged not to produce a particular crop or product. For example, if milk production is extremely high, farmers might be paid subsidies not to raise dairy cows, to reduce the amount of dairy on the market.

An agricultural subsidy is a governmental subsidy paid to farmers and agribusinesses to supplement their income, manage the supply of agricultural commodities, and influence the cost and supply of such commodities. Examples of such commodities include wheat, feed grains, cotton, milk, rice, peanuts, sugar, tobacco, and oilseeds such as soybeans.

Bank Stress Tests

A few days ago, the results for bank stress tests of european banks were published. A Bank Stress Test is an analysis carried out in crisis situations to determine wether a bank has enough capital to withstand the impact of these economic scenarios. The tests are used to find and highlight weak spots in the banking system at an early stage so that preventive action can be taken. These tests are carried out by the banks themselves or supervisory authorities as part of their regulation of the business.

Seven out of the 91 European banks that underwent these stress tests have failed them, five of them Spanish (Diada, Espiga, Banca Civica, Unnim and Cajasur). The others were the german Hypo Real Estate and the greek ATEbank.

These failed banks would need a total of 3.5 billion euros of new capital to meet the required standards and now have to agree with their supervisors a plan which will explain how the weakness will be resolved.

These results may seem relatively positive seeing as only a few irrelevant banks failed, but there has been a lot of talk about the severity and the way these tests are done. In the critics opinion, the stress tests are inaccurate as they do not show the depth of the actual debt crisis and are not carried out in a clean way.

The Final Countdown

Anyone who has been in New York sometime might have walked by this peculiar clock on Sixth Avenue. This is the National Debt Clock, which constantly updates to show the current US gross national debt and each American family’s share of this debt.

Back in April, the rating agency Standard & Poor downgraded the US credit outlook, meaning that the long-term outlook on US credit has decreased, but the AAA credit rating stays.
Now, the rating agency is close to downgrading the US credit rating from its Triple-A status. The US debt limit lies at $14 294 trillion, and the US has reached that ceiling on the 16^th of May. Under the law, the Treasury Department is not allowed to borrow money unless Congress gives its approval by raising the limit on borrowing. For now, the Treasury Secretary Geithner said he could keep the US out of default until August 2^nd.
So now American lawmakers are considering whether to raise the debt ceiling, an act that according to the president would not help the economy in the long-term, but seems like the only momentary solution. In respect to this, the democrats are striving to save budgets for large areas of government spending, while the Republicans are refusing to accept anything to do with a tax increase.
The urgency of this American debt ceiling crisis is that if the Democrats and Republicans in Congress do not reach a deal on the negotiations by August 2^nd the American government will basically go bankrupt. The United States will not be able to pay its bills in full as it will have run out of money.

Christine Lagarde; New IMF Managing Director

Last Tuesday, on the 28 of June, the IMF’s Executive Board announced to the world that Christine Lagarde has been selected Managing Director of the IMF for a term of five years, taking up her new position on July 5.
Christine Lagarde, the first woman to lead the IMF, has been the French finance minister during the global financial crisis and so she  is seen to be very familiar with the problems in the euro area.
A new Director needed to be appointed since the former Director, Dominique Strauss-Kahn, resigned in May due to being accused of abuse.
Therefore, starting on May 20 a month-long selection process was carried out to find a new Managing Director to lead the IMF.
There has been a lot of talk about the new choice for this position. Many people find that it would do the IMF and the global economy well,  to choose a non-European Director, as would have been the other candidate, the Mexican Agustín Carstens. Others are of the opinion that it is better to have an European, who is close to the actual debt crisis  Europe, to help to find  a solution for the problems in the Euro zone.
There are many goals that the new Managing Director has for the IMF, like pressing further reforms in the institution to achieve a balance of power in the world’s economies, creating a more effective IMF and strengthen diversity.

Impact on Business Activity

IGCSE BS: Impact on Business Activity