Economics Assignment Economic Events

Running Head: Major World’s Economic Events
Economic Events and how they have impacted the World Economies
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Major World’s Economic Events 2
Economic Events and how they have impacted the World Economies
The 1973 Oil Crisis
After the World War II, many countries experienced fast growth rate. America won the
battle and emerged to be a super power during this period. The period after the World War II is
referred to as the post war period (Bohanon, 2012). The 1973 oil crisis is one of the greater event
that marked the end of the Post war economic boom. The crisis resulted because there was a war
between the Arabs and the Israelites. The Arabs did not want the Israelites to have sufficient
supply of oil. The members of Organization of Petroleum Exporting Countries (OPEC) from
Arab imposed an embargo on the exportation of oil to Israel. All the nations that were claimed to
be helping Israel in the Yom Kippur War were the major targets for this embargo
(History.state.gov, 2017). These countries included; United States, Netherlands, Japan, United
Kingdom and Canada. It was however later extended to South Africa, Portugal and Rhodesia.
The main reason for the imposition of the oil embargo was that after there was a surprise launch
of military campaign against Israel by Syria and Egypt, the US supplied the Israelites with arms.
Not only did the oil embargo restrict the exportation of oil to targeted nations, it also did
introduce a cut in nations’ oil production level. The US economy had a strong dependence on
foreign oil and was thus severely strained during the 1973 Oil Embargo (Myre, 2013). President
Richard Nixon’s administration put more effort on an attempt to bring the embargo to an end but
the efforts were unsuccessful (History.state.gov, 2017). This made the US to have a need to
address the challenges that were being experienced from the overdependence on foreign oil. The
foreign oil corporations were demanded by the OPEC in the same year (1973) to raise the oil
price. In order to reduce the vulnerability of the U.S to oil imports, a new energy strategy was
announce by the Nixon administration on ways to boost the domestic oil production. Generally,
when there is a cut in oil production and the prices goes up, the importing economies feel the
squeeze. On the other hand, the exporting economies enjoy the high revenues raised since selling
at higher prices raise their revenues.
The oil prices rose sharply at the onset of the embargo and caused serious global
implications. The oil price started by doubling, it then quadrupled causing a rise in the consumer
costs and further a loss of stability in many world economies (Macalister, 2011). The US dollar
lost its value owing to this embargo and raised the prospective of this economy falling into a
recession. Some of the US associates had stockpiled oil supply to prevent the short term shortage

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(Japan and Europe). The US had sought to disassociate its relationship with US Middle East
policy; however, Japan and European countries needed it to help them in securing energy sources
because the high prices had put them in uncomfortable position. The US domestic oil reserves
were diminishing from the increased dependence on its consumption. It thus became more reliant
on oil importation than ever before which created a need to negotiate for the end to the embargo
since its economic situation was worsening. The negotiations however only resulted in its
international leverage fading. The situation was worsened by the fact that the embargo would
only end if the US succeeded to bring peace between Israel and the Arab countries. The crisis
came to an end after peace was achieved between Israel and Arab economies. It is this crisis that
resulted in the 1973-75 global recession.
This crisis was an important lesson to many world economies and raised the need to invest more
on domestic oil production rather than overdependence on oil importation since it was deemed to
create great challenges owing to the presence of market power. This has raised the global supply
of oil, the oil price is significantly lower. The US has increased its production to high levels such
that it is completely abandoning oil importation. The low oil price have driven growth in many
industrialized economies that are dependent on oil for production. However, the OPEC has
remained the sole controller of the largest world oil exportation.
The 2007-09 Global Financial Crisis (GFC)
The beginning of the GFC was believed to be on July 2007; a credit crunch is the main
impulse argued to be responsible for this crisis. There was a liquidity crisis which was caused by
the value of the sub-prime mortgages and this resulted in a loss in investor’s confidence. The US
Federal bank following this crisis injected huge capital into the financial markets (Davies, 2017).
The crises worsened in 2008 when the global stock market crashed and was so volatile. There
was increased uncertainty of the future as the consumers’ confidence became too low and there
were forced to tighten their belts.
The housing bubble in the US contributed much to this crisis. The US banking system
had lower regulation and they introduced the sub-prime loans where they advanced loan to even
the poor households who had no security back up (Amadeo, 2017). The housing market in the
US was performing poorly and the government had called upon the lending institutions to stop
discriminating on their loans lending on the basis of income level; this was like a form of
distributing income; the government acted as the security for the poor group and thus the

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financial institutions saw it more profitable to lend raise their level of subprime loans (Maxfield,
2015). This people were considered risky as the lack of security did not guarantee whether they
will be committed to repaying the loan or not (Savona, Kirton and Oldani, 2016). The increased
availability of subprime mortgage to every one at a lower rate of interest created an urge to
investment on long term assets (Farlow, 2010). Households opted to investment on housing
which led to an elevated demand for the houses.
Fig: Use on Money before the crisis
Source: Positivemoney.org (2017)
After some time, the value of houses rose to very high level which left the investors with
negative equity and some became unable to service their loans. Some even opted to resell their
houses at a loss and repay their loans. Others started taking additional loans in order to service
the initial loans. This raised the level of debt level for the US households. After the housing
resale, most of these investors had no other sources of income from which they would have
obtained money to repay the outstanding balance. Thus, there was a raised default rate; the
financial institutions hand lend over USD30billion through subprime mortgages and thus made

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huge losses (Positivemoney.org, 2017). When the default rate rose, the financial institutions were
left with only one choice, to tighten their lending. There was sluggish economic growth as
capital became unavailable both to the safe and the risky investors (Kates, 2011). This created a
credit crunch that resulted in the US falling into a recession whose impacts were transmitted to
many other world economies.
The global financial crisis entered a new phase in September 2008 when the Lehman
brothers collapsed (Economist.com, 2013). Other than the housing market, there was a crash in
the stock market. The US government made a proposal on an increased US$ 700 billion in an
attempt to rescue the financial giants of which idea was rejected by the congress. This left the
situation at its worst phase. The recession that originated from the US impacted many other
world economies as their interconnectedness had been raised through globalization. Many
economies started recording negative growth of the economy; there was a great fall in the
economy’s’ GDP level and GDP growth.
Australia is one of the economy that was a victim of this global recession. Its
performance had started following as the recession set in the US; however, this economy had
sound financial system. The Australian government announced a fiscal stimulus to stimulate
economic growth; the package was worth US$ 10.4Billion and was paid as at December 2008
before the Christmas Eve which saw a greater spending during the period and the economic
aggregate demand was stimulated (Berg, 2014). This resulted in a fast recovery of this economy;
this is among the few economies that did not feel great impacts of the global recession. However,
the long term effects is that this economy is still struggling on poor economic performance.
The European Union (EU) Regional Integration Agreements (RIA)
Regional integration involves an agreement between international state in order to
promote the flow of goods and services from one nation to another. It involves the revision of
import tariffs and quotas that are important factors for international trading. The integration
process of the EU has been coupled with doubts after the recent economic crisis shook it severely
after being for long the most developed regional integration model. The Eurozone integrity was
questioned for its failure to have a coherent and timely response during the euro crisis. The EU’s
model of Regional integration has been temporarily weakened by crisis. However, this model has
been noted to recover its confidence after crisis; Cameron (2010) noted that after the recovery
from this crisis, the EU model will continue leading as an example for regional integration. The

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EU’s historical reconciliation between Germany and France forms the fundamental basis for its
success; economies have to be in good terms with each other in order to have a common
agreement; the EU’s attempt is to promote such a reconciliation. The following underlying
principals are important to the EU’s success;
 Visionary politicians have abandoned the traditional balance-of-power model and have
conceived a new form of supranational based politics “community method”. An example
of these politicians are Konrad Adenauer of Germany and Robert Schuman of France. In
the early years, the US support was also crucial.
 The Franco-German axis generated leadership. Berlin and Paris have remained to be the
EU’s driving force besides the many problems.
 The integration of the project has been overseen through increase political will for
sovereignty sharing and construction of strong, legal, common institutions.
 The approach has been harmonized and is combined with tolerance and solidarity. The
EU’s approach is to help every member state whenever a major problem arises without
any isolation. For instance, the help that was offered to Greece during the recent crisis.
The EU hesitates in moving on with policies not until majority of the member states are
prepared. According to Cameron (2010), there is also a strong willingness to help poorer
member states to catch up with the norm by significant transfer of financial resources.
The EU has been guided by the above four principles over the years and it has enabled it to
survive many crisis. An example of such crisis include; the withdrawal of French representatives
from EU political bodies by President Charles de Gaulle from French; the president disapproved
the introduction of Qualified Majority Voting (QMV); a number of states have experienced a
failure in referendums on new treaties. Such treaties include; the Constitutional Treaty rejected in
2008 by Netherlands and France, and the Ireland’s Lisbon Treaty of 2008. The following are the
major benefits derived by the EU’s member states;
 It has enabled economies to reap trade benefits from each other and an improvement in
competition and resource allocation. It has played an important role in helping the
economies to specialize in certain areas of production. Economies production is strictly
on what they are efficient in producing and trading for what they don’t produce from the
other nations since there is improved terms of trade.

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 The member states have gained improved access to markets in other countries. The EU
here has played a role of providing insurance against multilateralism breakdown.
 The disadvantaged economies have received financial assistance from the EU which has
helped in uplifting many economies such as Greece. There is no EU economy that can be
left to suffer of its own.
 The multilateral bargaining power for the member states has risen in international
forums. It is always a belief that strength emanates from unity. The EU can be argued to
secure more international negotiations than any of the individual member states can.
 Further, European Commission and Milieu Ltd (2015) noted that strengthening of the EU
is bringing environmental benefits to the member states. The cooperation agenda is
taking into consideration the environmental demands. He also noted that trade and
investment barriers on environmental goods and services need to be reduced to increase
the benefits.
 Small states such as Cyprus, Iceland, Estonia, Latvia, Luxembourg, Lithuania, Malta,
Macedonia, Slovenia and Montenegro face development difficulties some of which are
being tackled by the UE thus promoting their economic health (Briguglio, 2016).

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