Global Economics Impact Your Business

Posted 1 January 2013 by in Business

Port of Thunder Bay

Port of Thunder Bay – From the middle of North America to the world.

THUNDER BAY – Business News – Global economics can dictate success or failure for countries, governments and your business. Northwestern Ontario is an area rich in natural resources. Understanding the impact of global economics is important to build your business. Our region’s bounty of primary resources has fueled economic boom in the region for generations. It has also led to economic turmoil and recession in our region. Increasingly our local economy has been impacted by events and realities far from our community. The shift in how people get information, now increasingly electronically with news coming to their smartphones, and computer screens, has changed the forest sector across Canada.

In Northwestern Ontario that paradigm shift has resulted in the closure of pulp and paper mills across the region.

Right now there is a major shift in economic focus toward mining. That means, for the intelligent business owner, keeping abreast of global economic trends is increasingly key.

The economies of the United States, China and in the European Union all dictate what happens in our local economy. Keeping abreast of what is happening around the world makes good business sense for local manufacturers, investors, and business owners.

Do Global Economics Matter to Your Business?

“Since the Chinese export half of their products to Europe, their economy has shrunk substantially (to slightly over 7% growth from over 12-13% just a few years ago). If Europe and China do not grow and the USA economy is already in the basement, Canada exports are going nowhere fast (the high dollar does not help either). So, it is not only Greece debt (which is only a symptom of a much larger underlying problem), but the world economy that is now so interconnected to impact every nation in a way or the other,” states Business consultant Frank Pullia, a Thunder Bay based consultant.

Pullia states, “For the last 1-2 years the focus of the global financial market has been on European economic and financial problems and the world had all but forgotten about the huge financial mess that the USA continues to perpetuate since the housing bubble burst in 2007. It now appears that the Europeans are getting their act together but the Americans are still bickering amongst themselves while their annual budget deficits and total debt continue to grow exponentially”.

The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (popularly known as the “fiscal compact”) enters into force on 1 January 2013 following its ratification by Finland. The treaty aims to strengthen fiscal discipline in the euro area through the “balanced budget rule” and the automatic correction mechanism. For the treaty to enter into force, it had to be ratified by 12 euro area member states. This condition was met when Finland, the twelfth euro area member state to ratify the treaty, deposited its instrument of ratification on 21 December 2012.

The treaty will be legally binding as an international agreement and will be open to EU countries which did not sign it at the outset. The treaty was conceived following the decision by euro area leaders in December 2011 that stronger measures were needed to reinforce stability in the euro area. It was signed on 2 March 2012 by 25 EU countries.

“In Europe, the Treaty on Stability, Coordination and Governance in the EU is a good start towards a system of checks and balances that is aimed at providing a more uniform approach to a fiscal and monetary union while leaving each country the sovereign independence and flexibility required to appease their local emerging nationalistic parties and tendencies,” comments Pullia. “Yes, they are there and they are growing because it is always easier to blame someone else than to look at the individual, group, or societal responsibility to live within one’s means”.

The idea within the European Union is to incorporate it as soon as possible into the existing EU treaties. The necessary steps for doing so should be taken within next five years.

Understanding the Fiscal Compact in the European Union

The new treaty requires the national budgets of participating member states to be in balance or in surplus. This goal will be deemed to have been met if their annual structural government deficit does not exceed 0.5% of nominal GDP.

The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union – better known as the “fiscal compact” – will enter into force on 1 January 2013 after ratification by twelve member states of the euro area. The treaty, which was signed on 2 March 2012 by the leaders of 25 EU member states, introduces strengthened fiscal discipline and stricter surveillance within the euro area, in particular by establishing a “balanced budget rule”.  It has now been ratified by Austria, Cyprus, Germany, Denmark, Estonia, Spain, France,
Greece, Italy, Ireland, Lithuania, Latvia, Portugal, Romania, Finland and Slovenia, and Finland.

Under the new agreement, national budgets must be in balance or in surplus under the balanced budget rule, a criterion that is met if the annual structural government deficit does not exceed 0.5% of GDP at market prices. They must also be in line with the country-specific medium-term budgetary objective, as defined in the EU’s stability and growth pact.  The balanced budget rule must be incorporated into the member states’ national legal systems, preferably at constitutional level, within one year after the entry into force of the treaty, i.e. by 1 January 2014.

The EU is moving at what for governments is break-neck speed.

In addition, the deficit must also be in line with the country-specific minimum benchmark figure for long-term sustainability. This figure is set by the preventive arm of the Stability and Growth Pact. The adjustment path towards this goal is assessed every year in the context of the European Semester.

Temporary deviation from this “balanced budget rule” is allowed only in exceptional economic circumstances, for example during severe downturns in economy. If government debt is significantly below the reference value of 60% of GDP, the limit for the deficit can be set at 1% of GDP.

Automatic correction mechanism

If a member state deviates from the balanced budget rule, an automatic correction mechanism will be triggered. The member state will have to correct the deviations over a defined period of time. The mechanism will fully respect the prerogatives of national parliaments.

Global and Regional Economic Impact

“Given that the European Union is a fairly recent concept (decades vis-a-vis centuries for the United States of America), it is important to put things into perspective,” comments Pullia.

“During 2012 it became evident that the sovereign debt of a little country like Greece could destabilize the global financial market. Why? Because banks and private capital lent foolishly to countries like Greece who could not repay and made a pile of money on high interest rates in the process”.

“Not much different than what the American banks did for the housing bubble there where massive government intervention was required to bail out the financial system. Now the German banks are crying foul and the governments of the lending banks are playing the austerity card pushing these countries and all of the European Union towards another recession”.

“Most politicians are usually more than happy to oblige by supporting unrealistic expectations (i.e. tell them what they want to hear and get re-elected, then blame the changing economic conditions if necessary) but debts of entire countries (sovereign debt) grew so large in the last two decades that they cannot be sustained (serviced) during times of recession or slow growth,” explains Pullia.

“In the past, a massive fiscal and monetary intervention like the one implemented by the USA and then the Europeans to stimulate growth would have worked, but it did not produce the expected results and now we find ourselves in even more debt and very few options given that interest rates are basically at zero”.

Is There Light at the End of the Global Economics Tunnel?

“On a positive note, this crisis offers an opportunity to implement the structural changes and economic reforms necessary for renewal and growth,” explains Pullia. “Through this treaty, Europe is taking some important steps that were long overdue and in a way highlighting the willingness of European leaders to save the Euro Zone by taking some extraordinary measures that would have been unthinkable just a few years ago. Are the American prepared to do the same or do we need to go over the fiscal cliff first?”

The United States Senate in a rare late night session voted at 02:00AMGMT-5 to an agreement on the fiscal crisis. The United States Congress will meet on New Years Day 2013 and a short term fix is likely. That move may simply delay the problems facing the United States.

For primary industry regions, keeping a close eye on the global economy is a key to staying ahead of the global economics trends.

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