What is economic sustainability? How can we attempt to measure financial sustainability?

12 Jan

Let’s start with the basics:
Economic sustainability is a multifaceted goal. It requires economic stability, a favorable business environment, and free market competition. Source.

So what is economic stability?

Economic stability refers to an absence of excessive fluctuations in the macroeconomy. An economy with fairly constant output growth and low and stable inflation would be considered economically stable. An economy with frequent large recessions, a pronounced business cycle, very high or variable inflation, or frequent financial crises would be considered economically unstable. However, financial stability and economic stability are two different situations, though they may cause each other. A financial system is stable when it dissipates financial imbalances that arise endogenously or as a result of significant adverse and unforeseeable events. When stable, the system absorbs shocks primarily via self-corrective mechanisms, preventing the adverse events from disrupting the real economy or spread over to other financial systems. Source

Potential data to measure economic stability:
– Absolute variation levels of key economic indicators: unemployment, inflation, interest rates, GNI/capita, etc. High levels of fluctuation (which we’d need to define) suggests systematic turmoil that needs to be addressed. Creditors are less likely to lend when there are high levels of economic uncertainty (from Krugman).

What is a favorable international business environment?
On the international scale, a country wants to encourage foreign investment by easing the barriers to invest, while maintaining enough control over the domestic currency to prevent ‘runs’ or ‘panics’ that can cause an economy to crash. Do the European Union trade regulations, both internal and external to the EU, facilitate this objective?

Potential data:
– We need to examine the balances of trade. Are net imports/exports constantly fluctuating? Is the Euro overvalued or undervalued for some member nations, hurting their trade? Do central banks have large enough currency reserves to assure investors that the system can handle shocks? This source provides several important data types that we should examine to evaluate the entire financial system of the EU.

In conclusion:
Financial sustainability is derived from economic stability. Without economic stability, creditors are unlikely to provide enough liquidity to investors for economic growth. To examine economic stability, we need to measure the historic and current volatility of basic economic indicators and purview regulatory laws (and their enforcement) to ensure the system promotes investment, free trade, and optimal finance.


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