World financial crisis shakes the idea of integrated Europe

Maka Ganiashvili

Future Prospects in the world and in Georgia

Current processes in the world arose many unanswered questions. Old theories and views loose their currency. There are many talks whether the free market theory has justified itself. Is the state regulation increase so necessary or the market should survive in a self-regulative order. Our magazine has discussed these subjects several times. However, they haven’t lost their currency yet. That’s why we decided to review these topics once again, in order to allow our reader to get abreast of the latest event development.
An article offers analysis of world’s leading magazine data. What our colleagues think about their governments and developing processes? What are the American press expectations of a new president? Of course, at the end of the article, we will discuss processes developing in Georgia; specifically we will review banking and insurance fields.
conomic recession goes on in the world. Crisis broadens its scales gradually, while the number of the countries, which cannot handle the crisis, is increasing. Economical crisis started at the end of 2007, covered every European and Asian country, especially leading countries such as USA, Great Britain, and Germany etc. Though, according to general assessment financial crisis has reached its peak, but as much negative events are to be expected in 2009 too.
UNDP has published a report – “The World Economy Situation and Prospects in 2009”. According to United Nations baseline forecast, world gross product (WGP) is expected to slow to a meagre 1.0 percent in 2009, a sharp deceleration from the 2.5 percent growth estimated for 2008 and the more robust growth in previous years.
UNCTAD (United Nations Conference on Trade and Development) study showed that at the end of 2009 some relief is expected in world economy. However, for the banks it will take 6-9 months to take up a previous position.
CIS countries’ growth paces are going to decrease to 4.8 percent in 2009, (This rate in 2008 was 6.9 percent). “Price decrease, global recession, and investment climate worsening in CIS countries will be especially reflected in Russia, Ukraine, and Kazakhstan” – states the report.
International Monetary Fund prognoses in 2009 do not sound encouraging either. As its experts declare, in the nearest future, market has no illusions left of WGP growth. If 1 percent growth were to be reached in 2009, this would be very optimistic scenario.
After covering America and Europe, crisis spread in Asia also. It reached Japan, one of the Asian countries with strongest economy. The head of Central Bank of Japan Masaaki Sirakaa declares that country’s economical situation worsens dramatically, as the crediting became complicated for the companies. Minister of Economy of Japan cannot comfort the population, as his prognoses are not optimistic either. He said that in the car industry of the country the growth of orders is not expected. The paces of economical growth of the world slow down, including the developed countries. Japanese Yen exchange rate growth has negative impact on the export of the country. Unemployment is becoming country’s main challenge.
Meanwhile, US new president Barack Obama enters the international scene. America together with the whole world is watching him hopefully. His presidency is the crucial point for United States and whole world. Angela Marker, in her congratulatory speech wished him to find solution to the economical problems. As the chancellor emphasized, “The key to world financial crisis is concealed in American economy”.
On the second day from Obama’s inauguration, Financial Times published broad article covering his way to presidency. Obama takes the place of unsuccessful president. He should undergo no less severe trials than Franklin did in the period of Big Depression. US 44th president has to fight at many fronts at the same time.
Just like in thirties, now economy is in deep recession and this is not an ordinary slump. Government has spent hundreds of millions to save the economy, nevertheless US financial system is far away from recovering. The threat of crisis prolongation is quite realistic.
New president should solve the Iran and Afghanistan problems, overcome chaos in Middle East and Pakistan, and cope with strained relations with Russia and strengthened China and India. In order to stop accelerated changes in political climate, he should take initiative of effective actions. Otherwise the events may become uncontrollable.
Obama should prove government’s devotion to the law; reestablish constitutional equilibrium between various branches of the government. At the same time, he should cope with serious challenges in the state security. Besides this, he promised that he will carry out overwhelming reforms in health care system. The problems in this field are matured and their solution requires supreme efforts.
Economical measures are in the first place. New team should overlook the financial system. They should nationalize failed banks and restore the capital of those banks that are able to accomplish their financial obligations.
New administration will require support from society in order to take more active steps in the financial system stabilization filed. Those skeptics, who do not wish to see the reality, are pointing to previous vain attempts. Without new strong financial stimulus demand of 2009, together with industrial and employment prospects are hopeless. And this applies not only to USA, but to the whole world also.
Obama would face difficult test in case if he manages to realize his initiatives. He should prepare society for long term results of the actions taken to save the financial system, in other words, increased taxes and cut state expenses. It is very tempting not to discuss these themes, nevertheless United States citizens and foreign investors should be aware of the necessary measures to restore budgets balanced state.
The next step would be more emphasis on international cooperation, especially foreign affairs and security policy aspects. However, the same can be said about economy. In order to consolidate US budget, current tax balance policy should be more expansive. It is essential to establish new institutions that will deal with the current challenges.
Nowadays, people trust the new president, moreover whole world is admiring him. Whole world is in need of Barack Obama. His successful presidency is a matter of interest for world society. This is a task both for Obama and for whole world. In this conceptual framework, changes not only economical view, but political ideas also.
In one of its publications, popular British edition “The Economics” puts the matter – maybe Europe doesn’t strikes for European integrity and the idea of united foreign policy is not as welcome as before? Maybe the idea of united market has shaken either? Is Europe going to continue its way to the “Promised Land”, called united European market? Has the crisis driven backwards the European Union on its way to complete integration? These are the questions frequently discussed on the pages of European press.
Meanwhile, establishing the common market of the member countries is considered as one of the achievements in the process of European integration. However, common European market hasn’t been formed as one economical space yet. Some sectors of the economy, tax and social security systems are still regulated by the legislation of individual countries. What are the reasons to such questions?
Of course, economic recession is guilty of everything and there is no wonder in that. Everybody remembers Iceland banking system failure. Great Britain’s problems in this field are gradually appearing. Germany and other member countries of European Union are rubbing shoulders too. Our emphasis on Iceland’s banking system wasn’t accidental. The current crisis in this small country made it clear that common economical space and common financial market means that problem existing in one country is a problem of whole union and many financial institutions are responsible too.
Understanding of this was painful for governments of the member countries especially against the background of world crisis. Big states are no less hard up than small countries. Therefore, small nations become a heavy load to bear. Hence leading countries do not welcome the big volume of crediting by financial institutions to small country’s banks as in the past. What should the small states do? Are dangers threatening the idea of united Europe? These are only theories, and every theory has a right to exist. Including the idea that financial crisis can bring the contrary results and assure everybody that it is necessary to become tightly integrated and establish banking system management common system. The new system similar to USA banking system regulation.
There is one thing we can be sure of – current economical recession clarifies whether “In unity there is strength” or “Each for himself and the devil take the hindmost”.
However, if you stop any passerby and ask him what his concerns are, he won’t answer you that he cares about Obama’s future plans or European integration process. One has nothing to do with the theories guilty in world economical crisis. Georgians care about those problems which directly concern them. The problems like Georgian banking system prospects and the insurance business challenges are more topical for Georgian people. Especially as because, insurance product prices increase is expected. This particularly can be said about medical insurance, as the prices on medicine and medical services increase day after day.
Insurance company “People’s insurance” representatives declare that at this stage insurance product price growth isn’t planned. However, in case of more rise in the price of insurance products they do not exclude insurance product price growth either. More by the token that they have received note from most medical service institutions about 20-25 percent increase in the price of medical services. “People’s Insurance” has full package of medical insurance products, including most popular health insurance products. Average price of insurance policy is 15-20 Gel.
The same situation can be seen in company “GPI Holding”. Here they resist to price growth on medical insurance products by all means. However, it is unclear how long will they manage to keep the current prices.
Prices on “Aldagi BCI” insurance products have not increased. As the company’s representatives declare, they do not plan any kind of price increase in the nearest future. Medical insurance is a leader in their insurance portfolio, followed by inland transportation and real estate insurance.
It would be very difficult to develop insurance business, in those countries where it is in the embryonic stage, without relevant state support. Georgian insurance companies are trying to avoid price increase, though if the situation doesn’t improve the process will be inevitable. It is already difficult to pay installment for indigent persons, and the price growth on insurance policies will bring automatic decrease in the number of clients. It looks as if insurance companies are facing insoluble problem.
Georgian banks are pending inspection. No wonder that Georgian banks are working to the best of their abilities. Foreign capital aid is crucial for them. This year has only begun and some banks already announced about possible sale of shares.
According to data portal “” International Financial Corporation and European Bank for Reconstruction and Development, can become stakeholders of the “Bank of Georgia” 5.5% shares. After allocating subordinated convertible credit, Financial Corporation and Euro Bank are allowed to become stakeholders of “Bank of Georgia”. However their share must not exceed 5 percents. “If the mentioned corporations desire, they will receive 5% of shares instead of money” – declares Bank of Georgia.
Euro Bank goes further and promises to support Georgian financial sector. Pitter Schmitt – CEO of the banking system of the mentioned organization declared that Euro Banks is planning to finance Georgian economy with 300 million Euros. “European Bank for Reconstruction and Development continues Georgia’s financial support. Besides this, investments will be made in the country’s infrastructure, telecommunication and transportation fields, energy sector, small and average businesses, agriculture development will be financed also” – said Mr. Pitter Schmitt and added that a matter of special importance is energy efficiency for them.
TBC bank announced that it will have new stakeholders at the end of the month. Common investment made by four international financial institutions (Including EBRD and WB) in amount of $140 million. They will buy shares of $80 million. Correspondingly TBC Bank’s current stakeholders have to decrease their shares.
65% of People’s Bank’s shares are already sold. Official stakeholder has become “Euro Oil”. It purchased stocks from Irina Jincharadze (20.18%), Elena Kovalenko (20.18%) and Ltd “Starcod Resources” (20.18%). One of the major banking institutions of Georgia has been sold for $12 million. The price of a share made up 1.2 Tetri.
This is the echo of current world financial crisis and its future prospects in US, Europe and Georgia. It became clear that world requires new leader, fresh political and economical blood, new theories and ideas. New world order is being established, with new allocation of the power. Experts say that American hegemony is coming to an end. However, they prognosticate that it’s now turn of China and India.