Whether 2008 Financial Meltdown in the Unit States and the Ongoing Economic Crisis in Europe Have Practically Ended the Era of Economic Globalization?

Whether 2008 financial meltdown in the Unit States and the ongoing economic crisis in Europe have practically ended the era of economic globalization?
Table of contents

1.0 Introduction 1
2.0 Discussion 1 2.1 Financial crisis 2008 in United States 1 2.2 Cause of financial crisis 1 2.3 Relationships between financial crisis in 2008 and economic globalization 2 2.4 The euro zone crisis 3 2.5 Cause of euro zone crisis 3 2.6 Relationship between euro crisis and economic globalization 4
3.0 The end of economic globalization-No 4
4.0 Conclusion 5
5.0 Reference 6
6.0 Appendix 7

1.0 Introduction
The global financial crisis was precipitated by a combination of asset price bubbles in the real estate sector and a credit bubble and then spread globally and rapidly. The direct impact of result in GDP falls of a lot of countries such as United States and European countries. The euro crisis caused the depreciation of euro and depression in Europe. Some people argue that financial crisis will lead to the end of economic globalization, while some people believe in the opposite. Economic globalization refers to combination of international economies through trade, direct foreign investment, flows of technology and labor and so on (Bhagwati 2004, 10). Globalization is a contributing factor for the rapid spread of global financial crisis.

This essay explores whether the financial crisis in the United States and the ongoing euro zone crisis have terminated the development of economic globalization. The essay aims to find relationships between economic globalization and financial crisis and explains the impact of financial crisis on economic globalization. It is believed that financial crisis will not terminate the economic globalization. The essay firstly analyses global financial crisis and euro crisis and then introduces their relationships and reasons for the final conclusion.

2.0 Discussion
2.1 Financial crisis 2008 in United States
During the global financial crisis from 2007 till 2012, the investment bank Lehman Brothers broke. Merrill Lynch and Countrywide Financial, Bear Stearns IndyMac Bank have experienced different extent of financial debts. In the appendix, the picture shows that most of banks struggle to be alive without sound funds in the situation of low customer confidences and reduced spending. This indicates the severity of bank crisis.

The severe banking crisis occurred firstly on June 20, 2007 due to failures of two highly leveraged funds. This demonstrated that even 3A rated securities were not secured anymore. The collapse of Lehman Brother then came. Before the banking crisis, cheap loans and reckless borrowings encouraged by the United States government led to a housing boom for large amount people with no or low income. Some borrowers defaulted on their mortgages. The banks had lent tow much comparing to the value of their reserves and were not able to sell repossessed homes to pay the loans. Banks had to maintain plenty of money in reserve to take on possible bad loans. Additionally, banks applied insurance policy to transfer their risks. Banks prefer high leverage to make many loans. A lot of banks lent tremendously more money than the value of the reserve. In August 2008, many banks had insolvency issues. And houses were selling at 50 pence at that time. Due to the interdependency of economies, the financial crisis spread widely to the whole world.

2.2 Causes of financial crisis
A lot of factors led to the crisis low level of interest rate, easy credit, ignorance from the government, large amount holdings of toxic assets, systemic risk in the economies, complicated environments and so on (Eduardo 2012, 522). The low interest rate of Federal Reserve and excess savings flowed into foreigners who offered safe debt investments made banks start to produce more loans to their customers through diverse financial products (Battern and Szilagyi 2012, 138). Achieving the loans and mortgage and low interest rate cause the housing bubble. Sub-prime mortgage market kept growing significantly due to the decrease of lending standard. High securitization activities and weak supervision to bank capital amplified the growth. The creation of financial products and other pertinent innovations allowed credit expansion and stimulated the housing boom. Owing to ignorance, investors did not understand the quality of these financial products and take into account the probability of decreasing housing prices. Financial intermediaries retained massive toxic assets because lots of investors did not want risks and banks took them. These large banks believed that they were too big to fall. The systemic risk became huger in the financial system when the housing bubble burst in 2007 (Allen, Xian, and Oskar 2012, 2970). The complex environment refers to confusing financial products and evaluation of financial situation because of interconnected banks network. In the banking system, a lot of activities were unregulated and investment banks could finance their activities via repurchase agreements. Consequently, lots of factors causing the bank crisis interacted with each other. Governments, banks and clients of banks contributed together to this crisis. The banking system and financial system had their own leaks for greedy people to create more bubbles until they realized that it was infeasible.

2.3 Relationships between financial crisis in 2008 and economic globalization * Globalization – a driving factor for the spread of crisis
This global financial crisis indicates that globalization not only shares prosperity but also shares difficulties. According to the spread of global financial crisis, the flow of financial products is tremendous. Cash flow, information flow and flow of people have reached top level. The information flow opens through multidimensional space. High level of fluidity of information contributes the spread and expansion of the global financial crisis. The modern financial markets for a wealth of financial products and derivatives produced widely connected and convenient channels (Jacoby and Meunier 2010, 313). When people realized that the financial crisis from United States spread globally, it was too late to prevent or stop the expansion. This indicates the potential power and deep impact of globalization. In other words, globalization is uncontrollable to some extent during the financial crisis. So it is doubtful that financial crisis could simply terminate the globalization which may expand beyond people’s expectation. The world recession in 2008 caused by United States evidently supports that globalization could make financial crisis infectious globally. Due to the globalization, the world become more connected and is composed as an organism so that relatively small effects from local area could spread globally. And financial crisis could affect the globalization negatively. For instance, United States reduce its consumption after the financial crisis and their import from China has tremendously dropped. The flow of exports and imports shrank due to the financial crisis. And the economic globalization may reduce the flow of imports and exports significantly.

* Economic globalization continues during the financial crisis.
Economic globalization started when financial globalization, globalization of human talent and enterprise globalization occurred. Organizations and people who grasped the chances of Globalization and occupied giant global market firstly have developed fast and dramatically. For instance, the rise of China is caused by its participation of global market such as the entrance of WTO. As an open country to the connected world, China obtain huge amount of foreign direct investment and trade flow. The country has a lot of flow of hot money. Before the financial crisis, the Chinese product has flowed to each part of world. Though the products made in China are criticized by customers in certain countries, the increased economic globalization brought China rapid economic growth and rapid growth of GDP. During the financial crisis, the growth of GDP in China is still higher than a lot of developed western countries. The rise of BRICS appears during the financial crisis. Some countries seem to be immune to the negative impact of financial crisis (Barkan, 2011, 590). These counties in BRICS become more open up to the global economy and turns challenges into opportunities. Hence, their economic flows, trade flows and financial flows were not damaged severely by the global financial crisis. The financial crisis may stop or reduce the economic globalization in some areas but it can hurt some certain places where the economy is promising comparing to some western countries. The economic globalization may continue increasingly in future in some areas due to their alliances. This indicates that they utilize international cooperation to help each other to fight against financial crisis. That is to say, economic globalization may continue to increase under the financial crisis. Hence, it seems to be impossible that the economic globalization will be terminated by financial crisis.

* The financial risks in the era of globalization
Information technology made web search a fashionable style. People have computer screens, TV screens, Tablets and phones screen to touch which accelerate the information flow. Financial risks are more highly leveraged by Zoom effect. Financial leverage enlarges the momentum of globalization and magnifies the risks building. The financial capacity is larger than the actual economic body. Average daily trading volume was us $ 3 trillion of foreign exchange; stock annual volume was more than million dollars and in 2008 global debt balance reached $ 86 trillion (Barkan 2011, 605). The reactions of financial leverage and derivative may speed up the economic globalization. Americans made financial leverage too risky and higher at the beginning of the financial crisis. This might be the reason to speed up the globalization of financial crisis.

2.4 The Euro zone crisis
The European sovereign debt crisis is an ongoing crisis called euro zone crisis that gave rise to the recession of some countries in the euro area and difficulties to repay the governmental debt without help from the third parties. In 2000, some EU members exploited future government revenues to meet the requirements of Maastricht criteria. A lot of European countries continued to sell rights to receive future cash flows. In 2009, the crisis appeared. Greek is the first country in the debt dilemma which is unsustainable shown in the table below. In 2013, the crisis still exists and is expected to expand. More and more European countries such as Portugal, Cyprus, Spain and Italy are in danger of debt. Apart from the economic damages to these European countries, the euro zone crisis may have political impact on the European Union. Eight EU countries including Greece, Ireland, Italy, Portugal, Spain, Slovenia, Slovakia and the Netherlands may be ruled out from EU. This indicates a potential new structure of EU and a new pattern of world.

(http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/data/main_tables)

2.5 Cause of euro zone crisis
The euro zone debt crisis derived from many complicated factors. The financial globalization, high-risk lending and easy borrowing from 2002 to 2008, the impact of global financial crisis, international trade imbalances of European union, EU fiscal policies with regard to government revenues and methods of using future government revenues to bail out severely damaged banking industries and bondholders intertwined together and intensify the euro crisis from time to time. The major cause at the beginning of the crisis is the global financial crisis resulted from America. The burst out of the euro crisis is the government debt problem in Greece.

2.6 Relationship between euro crisis and economic globalization * Uncontrollable Globalization – the root for euro crisis
Depressed demand for exports from EU members is the most evident channel by which the euro crisis spread to other economies (Bekaert, Campbell and Christian 2011, 18). The flow of credit and the flow of financial products are fueled by the economic globalization. Furthermore, people lost control of globalization. It is not possible to simply retreat to protectionism and political polarization (Biemann, Anett Eva, and Daneila 2011, 1642). To be specific, the financial system, the global supply chain for natural resources and the internet are beyond controls of each country. Even shutting down the internet may not be enough to help in controlling markets and financial flows. Technology and deregulation render faster flow of information and assets.

Globalization is uncontrollable. Many nations which are reliant on economic globalization cannot pull back the whole global organism. Online activities are ungoverned space with less regulations and censorship. What’s more, multinational companies find new markets to reduce labor payment and low taxation. Wealthy people also transfer their money globally to find new investment opportunities or avoid regulations and taxes.

* Globalization – a potential solution to euro crisis
Economic globalization has posed a lot of challenges to European countries. Golden Straitjacket defines that a country abides by the rules of globalization. For instance, a country made policies to reduce barriers so as to increase international trade and investment and to encourage foreign direct investment. Italy, Portugal, Spain and Greece may not be Golden Straitjacket which may make them more fragile in the euro crisis than countries such as Germany which are more globalized. For example, Greece has many barriers for market entry, less job creation and innovation and is mostly regulated in Europe (Jabko 2010, 326). These reasons may give rise to its poor competence against debt crisis. Greece could adopt structural reforms, create more jobs and modernize its economy so that it can become more globalized and adaptable to economic globalization.

3.0 The end of economic globalization – No
It is believed that economic globalization will not end due to financial crisis. But there is no denying that the amount of money flowing across borders has tremendously declined. Some argue that with the decrease of lending to overseas borrowers in United States, companies may pay more attention on domestic growth and some countries become isolationist and keep pulling back from international capital markets (Nam 2011, 1482). This may slow down the growth of economic globalization but cannot terminate the economic globalization. The first reason as mentioned in the 2.6 is that nations and international companies are not able to entirely retreat from the international market globally. And the economic globalization is uncontrollable. The main reason for these companies to be global is that domestic market is saturated and limited. They may still focus on global market where investments can bring them more profits due to the big market size and even high financial risks exist. Some countries such as China may not pull back the international because economic globalization could bring more opportunities and they are not damaged badly by the financial crisis or euro crisis. Instead, countries may make policies to become more globalized to be competitive in the euro crisis like Greece.

Through the analysis of relationships between economic globalization and crisis in Europe or the globe, the economic globalization will not end. In brief, the performance of economic globalization is unbelievable and has great potential during the crisis. The world is interconnected in multiple ways. Some channels of economic flows may not be expected. Economic globalization benefits countries and companies a lot. In future, companies and nations may still seek opportunities in the global market. The mechanism of economic globalization becomes more complicated. It may be jolted by the financial crisis but it will not disappear. Moreover, financial globalization fuelled credit growth and external positions across countries. What’s more, financial globalization provided a buffer against the crisis for some countries, whereas it amplified the crisis for other countries (Goldberg 2012, 220). Currency depreciation in some advanced economies improved their external positions during the crisis. It indicates that financial crisis may increase economic globalization for some countries. The crisis is making a new pattern of the world. If the appropriate international and national institutions are in right place, economic globalization may maintain potential energy to positively dedicate to risk diversification, more efficient capital allocation and consumptions (Fioretos, 2010. 389).

Apart from that, there are other reasons contributing to the growth of economic globalization. The technological revolution and advancement of technology continue to driving current wave of economic globalization. Tablets, Smartphone and information technology allow communication to be cheaper and easier. Corporations are able to expand their business globally with fewer costs and spread their operations. A lot of companies will cooperate with scientific talent in other countries. Companies in developing countries seek opportunities to collaborate with foreign companies with advanced technology via joint venture and foreign direct investment. These collaborations could propel new technological revolutions. The transfer of technology from developed countries to developing countries occurs. The economic globalization will not stop as long as technology advances.

The growing employment opportunities, higher education and more demanding skills are needed to compete in the global labor market, which contribute to the growth of economic globalization. There is a trend of student mobility from the less developed to developed countries. Institutional mobility has the opposite tendency. The economic crisis can reach to low income countries due to the educational trends. The crisis can result in reduction of employment and low household income. And thus it may lead to reduced educational funds from government, private sector and households (Roberts 2010, 57). Many universities lost their investments in foreign banks. Scholarships and student loans may be affected severely. The crisis may cause reduction of aid flows as well. This indicates that support in higher education could ensure large amount of equity from foreign students. The mobility of students especially students from China may still increase in future. In a lot of eastern countries, parents would like to support their children financially to study abroad. So the economic globalization in this sector will not cease.

4.0 Conclusion
In conclusion, the economic globalization in future will not be terminated by financial crisis. The economic globalization itself is complex and affected by a lot of uncontrolled factors. It is not easy to stop the economic globalization. A lot countries and companies may still seek opportunities and profits in global market. Advancement of technology, labor flow and information flow may still continue.

5.0 Reference

Allen, Franklin, Gu, Xian, and Kowalewski, Oskar. 2012. “Financial crisis, structure and reform.”Journal of banking & finance, 36(11): 2960-2973. doi:
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Barkan, Joshua. 2011. “Law and the geographic analysis of economic globalization.” Progress in human geography, 35(5): 589-607. doi: 10.1177/0309132510389221.

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Bekaert, Geert, Harvey, Campbell and Lundbald, Christian. 2011. “Financial openness and productivity.” World development, 39(1):1-19. doi: 10.1016/j.worlddev.2010.06.016.

Bhagwati, Jagdish. 2004. In defense of globalization. New York: Oxford University Press.

Biemann, Torsten, Fasang, Anett Eva, and Grunow, Daneila. 2011. “Do economic globalization and industry growth destabilize careers? An analysis of career complexity and career patterns over time.” Organization studies, 32(12): 1639-1663. doi: 10.1177/0170840611421246.

Eduardo, Pol. 2012. “The preponderant causes of the US banking crisis 2007-08.”
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Fioretos, Orfeo. 2010. “Europe and the new global economic order: internal diversity as liability and asset in managing globalization.” Journal of European public policy, 17(3): 383-399. doi: 10.1080/13501761003661984.

Goldberg, Gertrude Schaffner. 2012. “Economic inequality an economic crisis: a challenge for social workers.” Social work, 57(3): 211-224. doi:10.1111/j.1540-6210.2010.02246.x.

Jabko, Nicolas.2010. “The hidden face of the euro.” Journal of European public policy, 17(3): 318-334. doi: 10.1080/13501761003662081.

Jacoby, Wade and Meunier, Sophie. 2010. “Europe and the management of globalization.” Journal of European public policy, 17(3): 299-317. doi: 10.1080/13501761003662107.

Nam, Yoonjae. 2011. “Globalization of technology: network analysis of global patents and trademarks.” Technological forecasting and social change, 78(8): 1471-1485. doi: 10.1016/j.techfore.2011.06.005.

Roberts, Alasdair. 2010. “The rise and fall of discipline: economic globalization, administrative reform, and the financial crisis.” Public administrative review, 70(1): 56-63. doi: 10.1111/j.1540-6210.2010.02246.x.

6.0 Appendix

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