The impact of the European crisis to Indonesia

The European the financial crisis stems from the Government's budget deficit is so large in the countries of the European region particularly the countries of first layer i.e. Greece, Ireland, and Portugal. In addition, the ratio of debt per GDP is also growing that the limited ability to obtain financing deficit. The failure of monetary policy in the euro area, the limited fiscal space, and does not seem to make the recovery effort eurozone economy into decline.

The European financial crisis will spread to other areas. Propagation of the crisis is thought to occur because of the banking system of interrelated and complex in the euro zones itself and the outer regions of Europe such as the U.S. and Japan. Thus when one country on the first layer (Greece, Spain, Ireland, Portugal) experience a default, then it will affect other Countries' banking mainly Germany, Italy, and France.

Europe's financial crisis has triggered the global financial turmoil, among others, with the declining stock market indices in some countries which will give a huge impact on the real sector, especially trade based on bilateral relations, export, and import. Asian countries that routinely export their products to European countries are China and India. World economic slowdown related especially in developed countries, the global crisis has no effect on the direct trade route between Indonesia and Europe. But indirect trade routes Indonesia with Europe will be affected by China and India. China is the largest importer of goods estimated Indonesia would reduce their import caused demand developed countries declined against China so concerned about the potential negative impact that will give to Indonesia's economy.

European Economy in Crisis

Economic conditions of European countries particularly faces heavy pressure from the financial sector, the government in the form of a relatively widening budget deficit and rising debt burden. Further, the use of debt inefficient and unfocused is increasingly putting pressure on the government budget. The fiscal pressures impact weakening economic resilience in several European countries. There are some situations that still faces by Euro countries.

First, Fiscal deficit per GDP of the Euro countries are still high. A fiscal deficit of some European countries far exceeds the 3.0 percent of GDP. In 2010 the fiscal deficit widening occurred on Irish state which reached 30.9 percent of GDP higher than in 2009 (deficit of 13.9 percent of GDP). While the fiscal deficit of Greece and Portugal in 2010 decreased to 10.8 percent of GDP and 9.8 percent of GDP from the previous 15.6 percent of GDP and 10.2 percent of GDP in 2009. The Greek deficit in 2010 due to the requirements proposed by the European Commission, IMF, and ECB in providing bailout for Greece. Deficit per GDP Italy and Spain remain high despite decreases of 5.4 percent and 11.2 percent in 2009 to 4.3 percent and 9.7 percent in 2010. Meanwhile, Germany and France in 2010 each have a fiscal deficit of 4.2 percent of GDP and 7.1 percent of GDP. Overall budget conditions of these countries have begun to improve since 2011.

Second, The debt burden of the countries of Europe is increasing as a result of attempts to close the high fiscal deficit. A large amount of deficit as well as the use of inefficient debt increasingly adds to the debt burden of some European countries to reach half of the total GDP. Countries like Greece, Ireland and Portugal have debt per GDP higher than in 2012, i.e. each of 170.7 percent, 117.7 percent and 119.1 percent. Government debt per GDP of Italy and Spain respectively reached 126.3 percent and 90.7percent higher than the country's debt in 2012. Similarly, the condition of German and French sovereign debt is relatively high in 2010 of 83.0 percent and 90.0 percent. 

Third, the economic resilience of the euro area countries began to weaken. The European economic weakness condition can be seen from slowing economic growth and increasing unemployment. Economic slowdown occurs in almost all European countries. The economic decline that occurred in Greece due to fiscal policy in accordance with the government's spending cuts.

The unemployment rate in Europe has increased since the beginning of the financial crisis hit the United States and Europe in 2008. The unemployment rate in Greece is getting higher each year as well as other European countries. In contrast to other European countries, Germany managed to reduce the number of unemployed and only 5.5% in 2012.

Forth, Distrust of the European recovery, the condition improved. Distrust can be seen from the high market maturity yield long-term government bonds in European countries ranked downs several European countries, as well as the decline in growth projections by the European countries and the International Monetary Fund (IMF).

Distrust of investors concerning some European countries' economic uncertainty can be seen from the high payoff long-term government bonds. Since June 2012, the return for Greece debt continues to decline and increased in March 2013 with a value of 11.38. Portugal's payoff debt continued to decline until it finally only reached 6.1 in March 2013. While the payoff Irish debt increased in March 2012 again declined in June 2012 related to the recovery of market confidence about the Irish program. Return for long-term government bonds reached 3.83 in Ireland in March 2013. Meanwhile, investor confidence in the economy of Germany, France, Spain, and Italy is still relatively intact.

              Several rating agencies lowered expectations in March 2013, Fitch downgraded Italy's credit rating three notches to BBB + (Rooney, 2013). Italy's credit rating decline is mainly related to mistrust of Italy's ability to pay interest on 10-year government bonds reached 4.64 percent in March 2013. Standard and Poor's in October 2012 downgraded Spain's credit rating to BBB- due to the slowing economy and the high unemployment rate (BBC, 2012). While the French rating credit downgraded in November 2012 due to slowing economic growth caused by the gaps in the competition, high unemployment, public debt, and market rigidity (Willsher, 2012). 

Europe is faced with the increase in government debt that many of them don't pay and be a threat when faced with the question of how much debt will be wiped out and who is responsible for it. And if bad debts written off means there is the party that must bear the loss. This is the main reason for the loss of confidence in the European banking system.

              The financial crisis in one country will not happen if these countries have the strength of the currency, the financial condition is safe and strong export pace. However, the selection of the euro as the single currency of the European Union does not correspond to the expected results. Since joining the euro, Europe part of even experienced inflation and lead to expensive living costs there.

              Since its inception in 1950, the European Union has been run and controlled by the national government clubs. The political process became one of the issues of bargaining behind closed doors. Issues continue to be supplied to some state voter by the name of national interest. As a result of this union, each policy must be approved by 17 governments and ratified by 17 parliaments. The European Union has finally completed the sluggish financial problems because it involves many parties' consent. The challenge is so great that the European leaders have faced since the downfall of Greece, followed by Ireland, Spain, spreading to Italy then propagates to Italy, the United Kingdom, and France that were struck last enter into crisis because of the debt.

              There are not many options that can be done except by cutting the budget deficit will eventually cause a political and social crisis in which various public protests occurred. Stock exchanges in Europe also experienced a decrease in the lowest point. A range of policies to reduce the impact of the crisis on the countries of Europe have been put in place. But the necessary concerted measures among members of the Eurozone to ensure the effectiveness of these policies.

The impact of the current European crisis in Indonesia

The stability and resilience of the economy still maintained to this day, although Indonesia faced Global conditions are still uncertain. It can be seen from the inflation is still under control, foreign exchange reserves are still insufficient, banking conditions are still good, relatively good fiscal condition and a domestic economy that is still a source of economic growth. However, Indonesia's economy appears to be sensitive to the exchange rate of the Rupiah and also weakened in line with JCI (Indonesia stock market) and the migration of capital to assets that are seen more as a safe haven.

Stock Exchange Index. The uncertainty of the U.S economy and the Euro brings greater pressure to the Jakarta Composite Index (JCI). Stocks weaken as the response and panic investors who sought to avoid the risk of global.  The stock market index sank in August 2011 had declined by 3269.5 positions in October 2011. This index is a relatively temporary decline and rose in December 2011. However, the stock price market had a positive performance during the last month (Trading Economics, 2013). 

Confidence levels had decreased. Turbulence and uncertainty in global economic conditions take effect on the fluctuations in yield government bonds mainly raised. The yield could increase because of the domestic bond market affected sentiment negative economic conditions in the US and Europe are uncertain. These fluctuations associated with the presence of foreign investors selling action marked by the decline of foreign ownership in the securities of the State.

The exchange rate of the rupiah. The exchange rate of the rupiah suffered a weakening in February 2011 as Global investors do the release investment portfolio in stocks and securities State (SBN). The release of securities sparked an increase in the purchase of US dollars that end up making the exchange rate of the rupiah currency weakening. The strengthening of the rupiah took place in early 2012 due to the increased flow of capital into the country that encourages an increase in equity prices and exchange rates.

The development of Indonesia's inflation is still under control in the middle of the turmoil of world commodity prices.  The crisis that occurred in Europe and America brought the influence on commodity prices are likely to decline. The decline of commodity prices in the world market is mainly for raw materials Decreased commodity prices in drastic happens when the global crisis in 2008. 

In General, in an effort to face the possibility of the spread of European crisis into a global crisis, the Government policies need to be directed to maintaining market confidence, encourage external investment, strengthen the sector and enhance the sharpening on the national budget. Maintaining market confidence. In the face of the crisis that occurs, especially with exchange rate pressure happens, Bank Indonesia has been intervening to keep the stability of the Rupiah. It can be seen from Bank Indonesia's efforts to lower foreign exchange reserves to 105182.65 USD Million in February of 2013 from 108779.95 USD Million in January of 2013 (Trading Economics, 2013). In order to keep the supply of foreign exchange, domestic markets become more stable and sustainable, the Bank published Indonesia foreign exchange traffic policy associated with the receipt of export proceeds (DHE) and foreign exchange withdrawal of foreign debt (DULN) through Bank Indonesia Regulation (PBI) No. 7/19/PBI/2008 dated September 30, 2011. In the policy required exporters pulled the DULN through a foreign exchange bank in Indonesia.