If there had been no crisis in Greece, this domino effect would have been much less noticeable in other Eurozone economies. Lower economic growth has a negative effect on tax revenues worsening the government’s debt position. In a period of weak recovery, cutting government spending causes a further fall in economic growth. However, this austerity had a knock on effect on economic growth. European governments felt that in response to rising bond yields, they should cut spending and increase taxes (in short austerity). Rising bond yields and fears over government debt levels also caused a change in fiscal policy. With the change in market sentiment, bond yields rose, and this further added to the lack of confidence in the bond market. Italy, Ireland and Spain were not insolvent but without the ability to create money, they relied on investors buying a regular quantity of bonds. The problem is that when investors start to sell, other economies started to experience liquidity shortages. (In fact, investors realised Euro bonds were riskier because there was no lender of last resort) However, the realisation that countries in the Euro were not immune meant investors demanded higher bond yields. Previously investors felt Euro bonds were very secure. However, this change in market sentiment and loss in confidence caused investors to lose confidence in other Eurozone debt markets. (Greece is not on this graph, but Greek bond yields rose to over 25% in Jan 2012. Firstly, investors sold Greek bonds, causing a rapid rise in Greek bond yields. In 2011, when investors realised Greece was at risk of insolvency and bonds were at risk of default, it changed market sentiment. One major manufacturing firm closes down this causes unemployment, outward migration of labour, other firms going out of business, declining real incomes. Asia caused international investors to lose confidence and sell similar currencies in other Asian economies. Credit crunch 2007/08 – a shortage of finance in the US spreads throughout the world and to all banks.Debt crisis – 2012-13 Bond yields rise in Greece, causes rising bond yields in other Eurozone economies.In economics, the domino theory is often used to explain how an economic problem in one country can spread like a contagion or domino effect to similar countries and firms.Įxamples of the domino effect in economics Knock one domino over, and you don’t just affect the first domino, but all the ones who stand in its path. Domino Day – world record attempt for the highest number of toppling domino stones.The domino effect refers to how one action can have a knock-on effect to related subjects. ![]() The domino effect is exploited in Rube Goldberg machines. The energy used in this chain reaction is the potential energy of the dominoes due to them being in a meta-stable state when the first domino is toppled, the energy transferred by the fall is greater than the energy needed to knock over the following domino, and so on. The effect is the same regardless of the length of the chain. Upon pushing the first domino, the next domino in line will be knocked over, and so on, thus firing a linear chain in which each domino's fall is triggered by the domino immediately preceding it. The domino effect can easily be visualized by placing a row of dominoes upright, each separated by a small distance. The term domino effect is used both to imply that an event is inevitable or highly likely (as it has already started to happen), and conversely to imply that an event is impossible or highly unlikely (the one domino left standing). It can be used literally (an observed series of actual collisions) or metaphorically (causal linkages within systems such as global finance or politics). It typically refers to a linked sequence of events where the time between successive events is relatively small. This term is best known as a mechanical effect and is used as an analogy to a falling row of dominoes. A domino effect or chain reaction is the cumulative effect produced when one event sets off a chain of similar events.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |