An economic or financial crisiscan be regarded as one of the worst things that a country or the world can experience because it happens suddenly and unexpectedly. We know it’s tremendous and dreadful impact but what is an economic crisis? We can say that it is the sudden fluctuation of the prices of goods, services, factors of production and the value of the national currency exceeding acceptable limits for various reasons, and as a result, the slowdown of economic activities and the emergence of great uncertainty in the economy for the future.
There are a lot of notions for an economic crisis to occur. Perhaps the causes of the economic crisis today, the most serious since the war, can probably be found in the events of recent decades, historical, economic, anthropological, social events and even natural disasters can be a trigger to an economic crisis.
Here are some of the common causes of economic crises in the world:
- contraction in demand or excess supply in goods/services and financial markets
- unstable or populist policies
- Military interventions
- Lack of regulation and supervision in the markets
- Rapid changes in economic structure, technology and ecology.
Although it should be noted that, not every country has to experience all of these factors to have a crisis.Or, if one happens, does not mean an economic crisis is on the way.The cause and effect of a crisiscan change from one country to another.
What happens when an economic crisis occurs?
The effects of the economic crisis on a country are dependable on the size of the crisis and the macroeconomic balances but there are some common aspects that has seen in most of the crises in the past.
- Liquidity and credit crunch in the markets
- Rise in the interest rates
- Rise in the cost of a loan
- Shrinkage of the companies with higher financing costs
- High unemployment
- The national currency depreciates against other currencies
- Inflation rises
- Households’ purchasing power decreases
- Income level decreases
What makes an economic crisis so difficult and overwhelming can be explained by some common elements. There is no warning for when it will come. It happens abruptly so it’s hard to estimate its timing. As a result, a country cannot be fully prepared for it. Also, the duration is unpredictable, it can last for years or can recover swiftly. Therefore, the impact of the results is difficult to predict as well. It has a contagious effect. Because of globalization and integration, the nations depend on each other. So, if one suffers from a crisis, and can’t produce goods and can’t offer services, the others depending on it, also suffer.
How to overcome an economic crisis?
The emergence from every economic crisis to the safe surface, of course, will not be easy.In addition to losing money and economic growth, losing people's trust, anxiety and worry, low income, a decrease in living standards create a pessimistic environment. This may seem like it is impossible to overcome the crisis. But there are various actions that can be done to turn life back to normal. First and foremost, a country with an economic crisis can find an external source. External resourcesconsist of borrowing, ensuring the flowing of hot money and attracting foreign capital investments to the country. In addition, debt postponement can also be regarded as an external source. For this reason, the main part of getting out of the economic crisis within the system is based on outsourcing and the roadmap drawn by its providers.
The country can also ask an assistance from IMF. Without its guidance, neither hot money nor foreign capital will help. Another aim is that strengthen and increase the confidence of investors and households in the economy and the system in general. Also, political changes are usually successful in providing this confidence. This political change brings with it some changes in economic, social and socio-cultural systems. This chain of changes is critical in restoring confidence and restoring positive economic prospects. With suppressed consumption slowly rising to the surface, there will be noticeable improvements in demand conditions. As the improvements in the political and economic system begin to bear fruit, the economic expectations of investors and households begin to increase slowly but steadily in a positive direction.