According to EconomyWatch.com, international finance is a study of economics that deals with "exchange rates and foreign investment and their impact on international trade." In other words, it pertains to the financial affairs of government institutions, their investments and how this impact a currency's value on the international market. In the wake of what seems like a tidal wave of financial crises across the globe, it has become clear that international finance is riddled with complex problems.
One of the key problems facing the world of international finance is the rate at which governments are borrowing or taking out loans to keep the government functioning. Government borrowing impacts the value of its currency. If a government has $10 million dollars in loans, but has a high gross domestic product, its financial health would likely be assessed as good, as it would be able to pay the loan off with ease in a shorter amount of time. This confidence, via complicated financial equations, translates into a higher value for the country's currency.
On the other hand, a country with a large amount of debt that it will not be able to repay in the near future will see its currency's value tank. There are no limitations on government borrowing today, which puts even super powers like the United States at risk of getting in over its head, causing the value of its currency to sink in the global market. When this happens, citizens relying on this currency will have to spend more of it to buy the same things, putting massive amounts of financial strain on a population.
There are a variety of international financial institutions functioning in the world today, including the International Monetary Fund (IMF) and the World Bank. These organizations have the ability to lend money to governments in trouble, usually at a lower rate than other countries would offer. However, this lending comes with strict stipulations on how the money can be funded and what types of programs a government can operate while repaying the loan. For example, countries that are part of the IMF's Structural Assistance Program are limited in spending on issues like health, education and development, which could force its people into poverty. These kinds of policies are counterproductive for encouraging developing nations.
Interconnectivity vs. Sovereignty
In today's financial climate, the economies of the world are inextricably interconnected. On some fronts, this is perceived as a good thing, as it forces, to a certain extent, a minimal level of diplomatic interaction. However, because the ailment of one economy will inevitably affect the rest, tensions in negotiations over international finance have arisen in regard to global well being and sovereignty.
In the European Union, for example, the collapse of the Greek economy caused countries like France to call for a bailout, while Germany argued that it would not provide financial assistance to another country while trying to keep its own afloat. While Germany eventually agreed to provide financial backing to stabilize the debt crisis in Europe, a conflict of priorities exists between worldwide and national interests, and until a balance can be struck, the fate of every nation's economy could be impacted.
- Digital Vision./Photodisc/Getty Images