Economic Behavior and Organization

Question: Discuss about the Economic Behavior and Organization. Answer: Introduction The Euro zone crisis is a continuing economic crisis that has made it intricate as well as impossible for a number of countries in the euro area to reimburse their government debt without the help of any third party. The major cause that led to the European sovereign debt crisis was the amalgamation of multifaceted factors that incorporates the globalization of business. One narrative that describes the causes for the crisis starts with the significant augment in savings obtainable for speculation during the period of 20002007 when the international group of fixed-income securities augmented from roughly $36 trillion in the year 2000 to $70 trillion by the year 2007. Outline a reform proposal The reform proposal deals with Economic reforms and recovery proposals regarding the Euro zone crisis. The report provides an outline about the theoretical and empirical rationale. The coefficients of the Debt - GDP Ratio as well as the variables related to economic space variables are small and unimportant preceding to the crisis. It also provides the summary that is related to the likely impact on aggregate output and income due to Euro Zone crisis. In the commotion of the Global Financial Crisis, the concentration across all EU member states has been steadily to incorporate austerity measures. It also provides an outline related to impact on unemployment, inequality, poverty as well as environment. Theoretical and empirical rationale for the reform proposal According to a hypothesis that has been tested, it has been found that the public bond markets in the Euro Zone region are further delicate. As per the evidence, it was found that there was a noteworthy part of the rush in the spreads of the tangential Euro zone countries during the years 2010-2011 was detached from fundamental rise in the Debt - GDP ratios and fiscal space variables. The economic crisis that exploded in the developed world enforced authorities of the state to save their local banking systems from disintegrate as well as to maintain their financial systems that experienced their sharpest postwar downturn. The solution to acknowledge the sovereign debt crisis in the Euro Zone has to deal with an indispensable characteristic of a financial union. The members who are associated with monetary union issue debt in a legal tender on whom the authority can exercise no power. Consequently, the governments of these countries were not able to provide assurance that the cash will always be obtainable to reimburse out bondholders at prime level. As a result, the nonexistence of an assurance that the cash will be obtainable creates weakness in an economic union. When shareholders fear some difficulties related to payment, they sell the government bonds. This in turn leads to the rise in the rate of interest as well as it leads to a liquidity loss. The resulting liquidity crisis can without difficulty deteriorate into a resolving crisis. With the increase in rate of interest, there will be a probability that the country will be pushed into recession. This in turn tends to diminish government revenues and leads to augment in the level of debt. The grouping of escalating rates of interest and debt levels can drive the government into default. The liquidity crisis in the Euro Zone makes it possible for the materialization of multiple equilibria. The theoretical impact of a financial downturn on income inequality as well as poverty vague however; inequality and poverty will mainly increase because of low-skilled workers who are hardest hit by a crisis. In order to test the theory and provide an empirical rationale, it is important to approximate a model that describes the spreads by several primary variables. It is also imperative to recognize structural breaks in the model in order to discover out how vigorous the descriptive authority of the model is. It is first imperative to perform a rigorous econometric analysis that will help to explain the spreads. It is helpful to view to seek the spreads as well as the Debt - GDP ratios have changed over time in the Euro Zone. The graph represents the relationship between the spreads and the Debt - GDP ratios in the Euro Zone. It shows the Debt- GDP ratio in the horizontal axis and the spreads on the vertical axis. According to the diagram, there is a optimistic relation between the spread and the debt-to GDP ratio. In other words, elevated spreads are positively related to higher Debt - GDP ratios. The vagueness of economic theory on the cyclical or real wages is mirrored by observed studies that capitulate opposing consequences. This is mostly caused by measurement problems. Impact on aggregate output and income Due to the Euro Zone crisis, the impact of an economic decline on the level of wages as well as on the distribution of income is unclear. The shift of real wages over the business cycle has been resulted to be a contentious problem for a long time. The workers who lost their jobs throughout the Euro Zone crisis mostly suffered a steep drop in income. The anticipated income loss due to the crisis is at least 40 percent in all countries and in other EU countries; it is more than 60 percent. In approximately all EU countries, the individuals have resulted at a loss of more than half of their wages. Due to the crisis, the income of the unemployed developed less positively in most countries. There was no general outline of a broadening gap during the emergence of the crisis, as far as income inequalities between diverse groups are concerned. However, in approximately sixteen of the EU member states, the unemployed lost ground as compared to the population who were employed. In a small bulk of EU member states, both inequality in income and poverty declined however; on the contrary, Denmark, Lithuania and Luxembourg acknowledged a considerable increase in both poverty and inequality in income. On the other hand, Austria, Belgium and the United Kingdom experienced reduction in both income inequality and poverty for both employed and unemployed. Due to the Euro Zone crisis, there have been sizeable output losses that took place. Impact on unemployment, inequality, poverty The impact of the crisis on the level of unemployment differs strongly across the EU countries, even when the decline in the GDP is more or less alike. The decrease in real incomes of the unemployed resulted in an increasing rate of poverty among the unemployed however; in the UK, comparative poverty among the unemployed did not rise due to a drop in average median household income. Inequality and poverty would come into view to augment during a recession and fall during an upturn. In the initial phase of recession, the lower half of the distribution of income is compressed that in turn leads to less comparative poverty. The most recent economic crisis took place in the euro zone due to loss in employment in all member states of EU. According to the reports, it has been found that there is countercyclical real wages in Ireland as well as Spain however; there are pro-cyclical movements of wages in the UK and Belgium. Due to the long-term crisis, it might take longer for employment as well as rate of unemployment to return back to their original level. This is likely to be linked with hysteresis effects in that employees who lost their work during the crisis may undergo an enduring decrease of their human capital. The difference between external and internal labor market suppleness appears to be an imperative factor. Although, it is relatively easier to reduce the workforce by laying off permanent as well as temporary employees, the Euro Zone crisis leads to powerful increase in the rate of unemployment. Likely environmental impacts The environment has both direct and indirect financial value that requires to be protected. Indirect economic value deals with the self-esteem as well as physical health of the individuals. On the other hand, direct economic value deals with behaviors that create economic advantages as well as protect the environment. The momentum in the international environmental movement has been diverted in the middle of the economic crisis. Due to the crisis, there is always a fear that accepted policies might get shelved due to cost. The Euro zone crisis are likely to stop the sustainable development program of the European Union, as the desirable investments could be stationary or used in other ways not associated to the environment or to the sustainable enlargement. During the time of crisis, the incorporation of all environmental laws is likely to be weakened despite their existence. The environment is likely to be under pressure due to poverty however; the change in the developed countries will be mostly lead to change in the international climate. The crisis is also likely to lead to increased rate of releases of greenhouse gases that is likely to precipitate international climatic change. This in turn will result in unrelenting droughts as well as increased storm activity and major increase in the sea level. Whereas, the rise in the price of oil will show the way to increasing consciousness of the risks of global warming to generate unparalleled spurt in investment in alternative ventures of energy. However, the crisis in the Euro Zone is likely to induce the individuals to drive less, fly less as well as consume less energy. This in turn minimizes the prospects for greenhouse-gas emission. With the decline in the consumption of petroleum, the cost of oil is likely to drop that will in turn discourage investment in various expensive energy projects. Recommendation It can be recommended that the government require to announce the austerity package that has the greater possibility to have a thoughtful impact on average net wages as well as on the inequality of income. In this case, the crisis attracts a pointed dividing line between those who lose their jobs and those who stay in a job and undergo hardly at all from the crisis. On the divergent, if employers are not able to regulate their workforce quickly they have to route to internal elasticity, either by dropping the number of working hours or by cutting real salaries. Conclusion An imperative characteristic that is concerned with the sovereign debt crisis is that it exploded in the Euro Zone in spite of the fact that the economic position of the Euro zone as a whole was enhanced as compared to the economic position of the United States and the United Kingdom that were left unharmed by the crisis. It has been concluded that the resulting liquidity crisis can easily decline into a resolving crisis. As the rate of interest increases, there will be a probability that the country will be pushed into recession. After many years of abandoning high Debt - GDP ratios, shareholders has become more and more apprehensive about the high Debt - GDP ratios in the Euro zone, and responded by elevating the spreads. 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