The development of global economy always includes the periods of recessions and downturns. (Knoop, 2004) Recent complex economic and financial conditions both in UK and on the global scale have demonstrated that the government and special institutions of any country need to be able to forecast and regulate the macroeconomic situation in order to create the conditions for the further economic growth and return the stability and initiate the growth trend for the whole British economy. Many countries including UK stand at the edge on the new global economic shock that may be caused by the current European sovereign debt crisis. This is specifically bad because this kind of economic instability may harm the global economic recovery after the previous crisis that took place in 2008-2009. Bullard (2010) indicates one of reasons of this situation may the response of European countries to credit crunch, when many states made a decision to increase deficit spending. Basically it means the increase of their debt as a percentage of GDP. The basic start conditions of these countries were different, and for some of them who initially was weaker than others, for these governments the debt were so huge that the question about their ability and willingness to repay in international financial markets has appeared. (Bullard, 2010)
Unfortunately, the return of the previous economic confidence will be very complicated. Therefore, experts presume that the economic markets of many countries will be in trouble and unstable for a long period of time, possibly months or even years. In order to overcome this risky situation, it is recommended for governments to undertake the aggressive policies towards earning their new credibility. (Pemberton, 2009) After it’s establishing they need to focus on its sustaining during a long period of time. Besides, according to Bullard’s opinion (2010) one of the reasons of economic growth under these complex economic circumstances may be a well-run fiscal consolidation.
It is known that such sovereign debt crises like the one that the EU faces now are quite usual for the global economy, in general more than 250 cases of government defaults because external debt they wasn’t repaid (no matter, whole or partial) are known. A situation when countries at first borrowed the money internationally and then were not able to pay these borrowed means back happened quite often. Even if sovereign debt crisis is often being associated with market volatility, but in the majority of cases such situation doesn’t lead to the global recession.
The problem and at the same time the advantage of the EU is the interconnection of the financial markets and economies of the different countries-members, which means that such countries that face the of inability to repay their borrowings still will be supported by more stronger members of the union, and they will still have an access to international financial markets. The most popular approach of dealing with this problem is debt restructuring. (Allen, 2000) Actually this approach is not unusual and it even may be implemented without significant disruptions.
In the present paper I aim to provide the general overview of the macroeconomic policy undertaken by UK government that was developed in order to diminish the negative impact of the current credit crisis. I need to mention that the financial problems is not the only factor that may cause the overall economic crisis but the realization of how important this sector for the country brings forward the efforts of improvements within the financial sector of the country.
Before considering ways of dealing with international financial crises, it is necessary to understand why they arise, what role they play in international capital markets, and whether they can be detected. There may be a range of fundamentals over which an economy may subject to crisis.
The disciplining role of the threat of a financial crisis can be costly and indiscriminate. If a debtor’s financial condition is weak through adverse conditions rather than mismanagement, then the severe punishment meted out by creditors may be no fault of the debtor. As a result, policymakers attach considerable importance to identifying symptoms of financial crises ahead of time. And since crises can quickly spread between countries, knowledge of the ways in which financial distress is transmitted across borders also becomes important since it allows policymakers to anticipate possible ‘second round’ casualties of crisis. (Chui and Gai, 2005)
1. Effects on UK Economy
It should be mentioned that the recent negative economic and financial factors including 2007 credit crunch and recent events related to the sovereign debt crisis in the EU have caused a significant negative effect over the UK’s economy. Unfortunately the country has been experiencing the slowdown of the national GDP growth, the substantial rise of the unemployment and inflation rates, significant problems in the banking sector. These were serious arguments for the government and other national institutions to develop the effective fiscal and monetary policies in order to respond these challenges.
2. Reactions of UK Authorities against the Crisis
The reaction of the UK Authorities to the crisis was relevant and included monetary and fiscal policies. The major focuses were made on the survival of the UK banking system, VAT deduction, and also the rate of interest reduction. The aim of the government under these complex economic circumstances is to increase the money supply and these measures should consequently result into the rise of the national income. I need to state that unfortunately some of the government measures have led to the inflation rate rise and UK debt consequent rise (these negative tendencies may influence the rise of the unemployment and GDP decrease).
3. UK Economic Solution Effectiveness
Recent news (Financial Times, Washington Times, BBC, 2011) have demonstrated the confirmation of the UK Authorities measures effectiveness both by the IMF and the Bank of England.
For instance, according to Giles and Parker (Financial times), the economic strategy of the UK government is being supported and defended by the Bank of England. The Bank of England has made a recommendation to expand the government measures related to the Bank of England. The economic problems experienced by the country in the recent times and the serious risk of inflation rate rise are the solid arguments for the monetary policy of the Bank of England that is ultra-loose. It corresponds to the major tasks of the Bank of England, one of which is the monetary stability that included the low inflation rates. (“Monetary Policy Framework”, ca. 2012) It is obvious that damage caused by high inflation may have a very negative impact over country’s currency stability and overall economic situation. Therefore these measures presented by the Bank of England to keep the inflation rate low are crucial and help to sustain economic growth.
Recent International Monetary Fund (IMF) has stated that UK’s present economic policy doesn’t require any substantial changes into it. In accordance to the interview of IMF’s J. Lipsky to BBC (2011), the negative economic trends UK faces with these days are temporary, although some economic risks truly exist. In accordance to IMF’s medium-term forecast for UK market, it will achieve an average 2.5% growth rate. (BBC, 2011)
The monetary and fiscal policies of the Bank of England were also commented by the representative of IMF, stating that the current low interest rates will allow to pay off the debts both the companies and individuals and also will result in the exports revival.
It should be noted that according to Bullard (2010), the most important lesson of the current crisis is that the borrowing on international markets is a delicate matter. Such international debt may offer some benefits and also it can harm the country’s credibility and lead to the sovereign debt crises. (Chapman, 2011) Therefore, a conclusion could be made that international borrowing should not be the way to achieve prosperity, it simply will not happen that way.
Regarding the measures undertaken by the UK Authorities, a conclusion could be made that the macroeconomic policies that were presented by UK Authorities and their overall reaction to the crisis are relevant and professional. They are able to keep the pressure of the economic and financial problems and lead UK’s economy out of the recession. In accordance to the IMF staff opinion post-crisis repair of the UK economy is underway”. (BBC, 2011) Besides, the specialists of this financial institution claim that financial services sector is also in its recovery phase. (BBC, 2011)