The global financial world has been shifting from one crisis after another leaving the global investors dismayed about the future prospects. It all started in 2008 when sub-prime borrowers defaulted and or reneged in their monthly payments which caused the collapse of thousands of savings and loan banks in the US and an astonishing amount of money was lost not only in the US but also across the world. Thanks to the ever vigilant US Central Bank a major crisis was avoided. The remedy used then was to introduce a concept of quantitative easing through which nearly $ 4 trillion fiat money was pumped into the economy. The lesson learned is that pouring in adequate liquidity helped the US and the global economy to pick up confidence and hope. As though it is not enough, the Eurozone went into a crisis in 2011. This time a small country, Greece one among the 19 members was about to default on the sovereign and bank loans. For a country of 11 million people with nearly 400 billion euro debt is outrageous and any default by them would have made several European banks bankrupt. Again under the leadership of Dr. Mario Draghi the ECB president, they adapted quantitative easing like in the US and pumped in 1.5 trillion euro to help Greece payoff its debt. The solution suggested to Greece was tighten your budget reduce fiscal deficits and live within your means. Currently, it is not working and it is likely that a new crisis is in the offing. The next crisis which is likely to happen in the Eurozone is the topic of conversation between a student and his professor.
Student: I read in the papers that the British people are going to vote in the referendum on June 23, 2016 to decide whether they should continue to stay in the EU (European Union) or quit. My questions are,
Professor: Funny. You are examining me. I should get atleast a satisfactory answer to pass the course right, just kidding.
Regarding your question no. 1, is it not in our nature blame others when things are not going well for us? British people are spoiled people receiving in big social security benefits and leading a life as though the world owed them. British labour has one of the lowest productivity in the industrialized world. Their people are wrongly judging that their problems are external and being a member of EU is one of them. The British currency namely the pound has dropped from 1.75 dollar to it to 1.40 today, a near 35% depreciation.
Regarding to your second question, the British citizen have chosen a dangerous path. The current relation is built over a long time. Many investments and business practices have evolved overtime. People crossing the English Channel enjoyed the vast expanse of the entire European continent and freedom to move around and work if found attractive. So all these will we challenged but I cannot guess the outcome.
Regarding to your third question, the impact will start with their cross border trade. Many restrictions and barriers will become the order of the day. Facility to trade easily will disappear. More regulations and rules will be introduced. So the trade will suffer. Both their currency value will go for a toss. Already traders in the Britain and the world are hedging the risk against the eventuality. We will have to wait and see as to how all these will pan out.
Your last question is at the moment unanswerable. Like the usual politicians say on any matter, we need to wait for the details. We cannot presume anything. Enough questions, OK.
Student: Thanks Professor.
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