Exchange Rate Euros & How Euro Debt Crisis Affects The World – Part 2

October 2nd, 2012

In part 1 of this article we discussed exchange rate euro, the euro zone debt crisis and the seriousness of the situation in terms of its effects on the U.S. economy. A weak euro automatically increases the value of the US dollar because it becomes the safest investment opportunity. The Indian economy relies heavily on getting a good foreign exchange rate on the U.S. dollar. It relies heavily on imports from America to support its economic growth, which are generally purchased in dollars.

The decline in the value of the rupee will effectively make any exports or services coming out of India cheaper. India relies very heavily on imports, particularly for fuel, and as this is paid for in US dollars, fuel prices will soar forcing price increases on products and services. This will further negatively affect the Indian economy as cheaper alternatives will be sourced.

This forces forex reserves to decline quite quickly. Input costs to produce and deliver products will increase, and margins on products will reduce significantly. General prices for food, fuel and other fundamentally necessary essentials will go through the roof and businesses will be forced to cut costs somewhere. This generally tends to be in the form of pay cuts or job losses. India could end up in a similar position to Europe, so what lessons can India take forward from the euro zone?

The Euro debt crisis did not just happen overnight, it was a result of financial globalisation and string less credit circumstances from 2002 to 2008. This was the period of time that sanctioned and encouraged high-risk lending, allowed trade inequity on an international scale, and over inflated property prices that crashed quite catastrophically. This is just to name a few mistakes of the many that led to the European financial disaster that caused exchange rate euro to come crashing to the ground.

Unfortunately in India, successive governments have forgone economic consolidation at the hands of growth. India’s Finance Minister announced that the country’s deficit stood at 5.9% GDP for years 2011 to 2012 i.e. the disparity between government earnings versus spending. In five years, India’s deficit has quadrupled, yet earnings have only increased by 36%. It is bad economic and fiscal management that has brought trouble to Europe, so India must be careful not to make the same mistakes. The lesson here is ‘cut your coat according to our cloth’. The euro zone and exchange rate euro is having a massive knock on affect on other world economies, which could spell global economic disaster if austerity measures are not met.

Keep a look out for more interesting articles on world foreign currency matters, with Best Exchange Rates UK.