The Eurozone
The Eurozone was hit severely by 2008 to 2009 global financial crisis. Consequently, various nations incurred incredible threats to the stability of their financial systems. This situation was witnessed in countries such as Portugal, Italy, Ireland, Greece, and Spain (PIIGS). Until today, these countries have sustained serious financial debts that threaten them to be declared bankrupt as one of the consequences of failure to repay their loans (Roubini & Mihm, 2016). In the effort to get the nations out of trouble, the International Monetary Fund, the European Central Bank (ECB), and other member states to the Eurozone, which also adopted a common currency (Euro), considered bailing-out PIIGS. By so doing, other member states would shield themselves from troubles associated with trading within the same regional blocks with nations that had large debts.
Bailing-out can work effectively only if all Eurozone member nations consider adopting structural and monetary policies that can help destabilized member nations to regain stability. After receiving the loan, one of the monetary policies that would help PIIGS to stabilize is the deflation of their currency, in this case, the Euro. The policy would make their products cheaper, hence becoming more competitive in the international markets. Through economies of scale, the nations would grow their productivity. This policy requires approval by all member nations. However, the policy cannot succeed (Roubini & Mihm, 2016). Already stable nations such as Germany, which will help in bailing out PIIGS, cannot consent to such policy, as it would lead to the weakening of the euro against the dollar. Therefore, bailing out of PIIGS without considering adjustments of monetary policies towards the euro would reduce the number of Euros available to the Eurozone for trading with other nations.
Floating the Yuan to the US Dollar
Considering the discussion, it is clear that China adopts an appropriate strategy that permits the variation of its currency against the Dollar to take advantage of international trade. Hence, the nation does not adopt the floating exchange rate policy. Indeed, the cornerstone of the economic propensity of China is based on exports. Lipman (201) reveals the absence of a specific known value of Yuan in Dollar terms, despite the general agreement that the currency is significantly undervalued. Depending on the variations of global trade, the People’s Bank of China (PBOC) sets an appropriate reference point of Yuan against the Dollar for the Dollar to fluctuate within a predetermined band.
When Americans complain about the low pegging of the Yuan against the Dollar, China responds to the concerns. However, its moves are well calculated to ensure that any upward adjustment delivers more value to the nation. China has large reserves of treasuries in the US market. By recycling all Dollar surpluses through investments in the United States’ treasuries, the government of the US acquires the capacity to fund its budget arrears, including maintaining its bonds within low yields (Lipman, 2011). China is the largest holder of the United States’ treasuries. In 2013, the amount was in excess of 1.3 trillion. This situation introduces yet another challenge for the US. In case China devalues its currency against the US and/or chooses to trade all the treasuries, the Dollar would significantly be devalued.
From the above arguments and those developed in the discussion, China is a currency manipulator. Adjusting the ‘peg point’ upwards or downwards has financial implications, which the US is immensely concerned about. For instance, by raising the peg value, China may consider selling out its treasuries held in the US. Downward adjustments may boost the competitive advantage of Chinese-made goods in the US while decreasing the attractiveness of US exports in the Chinese market. The overall outcome will be higher trade deficits. Nevertheless, such adjustment is appropriate for the US. It enables its people to buy goods cheaply, hence reducing their cost of living. Consequently, as a currency manipulator, China’s economy still shows signs of surpassing that of the US.
The attractiveness of US Corporations that seek FDI
The US has to deal with the challenge of ensuring its products are attractive to its market and to the international bazaar. Therefore, it needs to ensure that production is accomplished in the most effective manner to compete with imports from low-cost economies such as China. This plan calls for the US corporations that seek to invest directly in foreign nations to consider various nations where optimal gain can be acquired. Two possible options are India and the UAE.
The UAE option has the merit of having large cheap energy that can be used in ensuring low-cost production. The nation is mainly a consumer market that has a soaring appetite for high-end products in terms of quality and appeal, which the US corporations are well known to have the capacity of manufacturing. Since the main concern of the US in its trading relationships with China is on the competitiveness of its products in the Chinese markets, the UAE may provide lasting solutions to US-based corporations that seek attractive nations for their direct foreign investments. However, some critical risks must be considered. For instance, in the case of China, the UAE pegs its currency on the Dollar.
Pegging of Dirham against the Dollar may not cease in the near future. The UAE investments are rated in US Dollars. During the forum of the seventh international financial markets held in Abu Dhabi in March this year, the administrator of the UAE Central Bank cited this case as the single most important reason for not de-pegging the Dirham to the Dollar. Superintendent Mubarak noted that the Dollar is important to the UAE since it guarantees the nation’s economic stability to mitigate fluctuations in economic growth (Bouyamourn, 2015). Another important risk that such corporations need to consider is the availability of labor. The UAE relies heavily on expatriate workers. Consequently, corporations that seek to invest in the UAE have to employ many expatriate workers while complying with the government’s strident regulations on the Emiratization policy.
India does not have the demerits associated with direct foreign investments in China and the UAE. The nation has a large consumer market that is appropriate for US corporations. It has relatively stable fiscal policies that guarantee the steadiness of its currency. It also possesses a large population of highly skilled employees. Since any involvement indirect foreign investment would involve cost saving in production, India remains the most single important nation for the corporations. It has a large population of workforce that is not only highly educated but also supplies cheap labor. This atmosphere is necessary to boost its competitiveness in the global market for products that are made by US corporations.
Enron and Worldcom Scandals
Enron, Worldcom, option backdating, government bailouts/nationalizations, and Madoff indignities constitute one of the expensive corporate governance tests of the US investment market. However, amid this expense, the experience helped the US to develop appropriate frameworks for protecting stock markets to regenerate investor assurance and dependence. The US security markets became cleaner and more reliable when compared to the rest of the world. When Enron, Tyco, and Worldcom deception took place, the US legislators sought to develop a policy that would not only reawaken corporate investors’ poise but also ensure that such frauds would not occur in the future. Consequently, the Sarbanes-Oxley Act was endorsed in 2002 to create guidelines that pushed all organizations to comply with the principles of corporate governance. The Act, also referred to as SOX, seeks to enhance the protection of investors from corporate crimes (Jahmani & Dowling, 2009). It emphasizes disclosure of accounting information through legal frameworks to minimize deceptive activities within corporations.
Stock markets in the US are secure since organizational management has a mandate of ensuring that inventors’ funds are not exposed to risks as part of corporate social responsibility. Before this requirement was put in place through the SOX, the US experienced three of the largest cases of fraudulent activities acerbated by corporate managers. Bodies mandated with conducting oversight roles on behalf of investors also experienced challenges due to a lack of policy frameworks to foster their independence while scrutinizing corporate financial accounts (Jahmani & Dowling, 2009). In some instances, auditing organizations also engaged in other businesses such as consulting arrangements with companies they were required to audit. The Sarbanes-Oxley Act endeavored to seal all loopholes that made it easy for corporate managers to engage in fraud, which is against the corporate governance principles, which make the US security markets cleaner and more reliable when compared to the rest of the world.
Reference List
Bouyamourn, A. (2015). Dirham sticks to the Greenback. Web.
Jahmani, Y., & Dowling, W. (2008). The impact of the Sarbanes-Oxley Act. Clute institute-Online journal, 6(10), 57-66.
Lipman, J. (2011). Law of Yuan price: Estimating equilibrium of the Renminbi. Michigan Journal of Business, 4(2), 5-23.
Roubini, N., & Mihm, S. (2016). Can Europe be saved? Time is running out to rescue the economies of Portugal, Ireland, Italy, Greece, and Spain. Web.