Europe in a mess
Thursday, May 06, 2010 Posted by Magesh Kumar
Europe in a mess
With the size of the Greek economic quandary dilating from that of a cow to an elephant day by day, economists and others around the world are beginning to ask the same question in their minds – “will Europe hold together?”. Greece, the birthplace of the Western civilization, now is becoming more and more excruciating for the ECB, IMF and the other EU economies.
It is not a secret anymore. The fiscal deficit of Greece has touched uncontrollable levels. Hopes of recovery are fast diminishing, even among the Greeks themselves. In a near catch-22 situation, Greece has only two options to come out of this gloom – dramatically increase tax rates, or drastically truncate social expenditure, both of which will result in more tears than smiles, given that unemployment is already looming at about 10%. In fact, a line of rationale tells me it’s better for Greece to remain idle and allow itself to become insolvent, than to opt for either of the remedial measures mentioned above – a classic instance of the cure being more bitter than the pain.
Perhaps, one wonders, Greece may have been spared of this curse had it not been a member of the EU. And the logic behind it stems from fundamental macro economics – had Greece retained its own currency the “drachma” instead of switching to Euro, it may have been possible to devalue it at this juncture, so as to boost exports, which would have brought in more tax money to the Greek government. This is not possible with a common currency.
The rest of the EU is in an equally deep mess. Some are favouring a loan to save Greece from insolvency, while others, headed by Germany, strongly oppose the idea. “What is the point of giving money to a government that has failed to manage its own money?” asks Berlin, and I too endorse the same opinion. Berlin also fears that this might become a habit, as there are a number of economies lined up in queue, waiting to follow the footsteps of Greece – Spain, Portugal and Italy to name a few. (Obviously Germany has little faith in the Obama-style bailout packages).
EU’s growth rate has not been appreciable either. Foreign investments into the continent are decreasing, as Europe is becoming less and less attractive to do business. Many Europeans themselves have come to realize that the future does not belong to the white man, but to the yellow man and the brown man (yes, I’m talking about the Chinese and the Indian).
Fraught with so many reasons to frown, and none to smile, I wonder if even a FIFA world cup victory would bring a smile in the land above the Mediterranean.
MK
Posts
May 6, 2010 at 11:30 AM
Hi Magesh..Greece would have been worse-off if it is not a euro member.
1. If Greece had its own currency, the Greek bonds that were issued by Greece have to serviced by "Drachama" and as a result interest payments wuld have gone up.(because of poor credit ratings). Now,the service currency is common Euro, and so it is in a better situation.(lesser debt outstanding payment)
2.Letting a county to go insolvent is a bigger problem than the one we have right now.
Do correct me...
May 6, 2010 at 11:35 AM
......"Perhaps, one wonders, Greece may have been spared of this curse had it not been a member of the EU."...
Greece overspent and that is d reason for its crisis. How does being a Euro member causes the problem? In fact, Euro requires its potential member to adhere tougher financial regulations in order to become a member..
I support your view of not making "bail-out" as a habit. but do we a better solution? nope..v don have one.
May 6, 2010 at 12:32 PM
Hey MK
Very well written..
I would say They should not bail out Greece.. let it go into the hands of a strong European country and that too which has money and can control this country better..
it will be good both for greeks and EU
European countries had seen a tough phase in this recession, so its no point taking more of a burden of a country that failed to managed its resources..
Comments on this are welcomed
Saurav
May 7, 2010 at 10:19 PM
@ Guna... if Greece had retained the drachma, the drachma's value would have gone down due to increased supply/circulation of Greek bonds, whereby interest rates may go up, giving the govt. more income... this was my logic behind tat statement...
2) Greece has to be allowed to become insolvent... u have already answered this in ur 2nd comment... "Greece has overspent." Why shd a country that does not know how to manage its money be given more money? it will most likely default...
Cheers
MK
May 7, 2010 at 10:19 PM
3) being an EU member is surely half of the reason for Greece's miseries. After the formation of the EU, stronger economies like Germany n France have benefitted, while countries like Greece have not... with a strong currency like the Euro, u need to bring about economic growth... Germany could do that, coz it's an export-oriented economy... but Greece could not do tat, as a result of which its people had to suffer high cost of living with unchanged wage rates... when u take EU as a single body, this is called swelling, not growth, as it is irregular... (veekkam, not valarchi) just the case in India... the IT revolution was picked up by the southern states (except Kerala) and Haryana, while certain other states are still backward... their people are suffering high living costs... do let me know ur views on this...
Cheers
MK
May 7, 2010 at 10:21 PM
@ tibby... tat is also my opinion... after all, Lehman brothers, which crashed, did more good to the economy than AIG (which was bailed out)... coz the LB crash led to huge market corrections world wide...
Cheers
MK
May 8, 2010 at 12:26 AM
@ Magesh.. How come government's income will increase when the government is supposed to pay more n more interest to service the govt bonds?
Unchanged wage rates? Greece's wage rates are at par with other European countries, if not the highest amongst them.This is one of d primary reasons y Greece is facing huge deficit.
Allowing a country to go insolvent is not a "positive return" solution. I mean it will hurt everyone. If Greece do not know how to manage their money, give them ur money with stricter, tighter restrictions,so that they come out of their problem.. thats d way out.
After all Euro is highly interdependent on economic well being of all Euro nations.
May 8, 2010 at 12:41 AM
Growth can never b uniform.. u may call it any name dude:)
Its just not possible to have equal contributions from all sectors..some sectors will grow faster than some other sectors. Its very very fundamental.
we simply cannot conclude, IT revolution is d reason for high living costs in other parts of country. Cos, IT revolution can increase the consumption, thereby demand, there by supply frm other allied sectors..its called percolation of growth..
May 8, 2010 at 12:45 AM
@ Saurav "let it go into the hands of a strong European country and that too which has money and can control this country better"
Going by ur logic..y another strong country shld take control(if its practically possible:))of Greece? Whats d incentive to do that?
May 18, 2010 at 10:19 PM
sorry for the late reply Guna... jus remembered this today... btw, Greece's wage rates are not at par with that of the Western European nations... infact, this is the reason many Greeks migrate to Italy in search of higher-paying jobs... n when Greece has already mismanaged its exchequer, there is no point in "giving them ur money with stricter n tighter regulations"... it ll surely default again... its like giving a loan to an insolvent and charging him interest on it... as u say, Euro is dependent on economic well-being of its nations... when a nation is doing so poorly, i think it makes sense to remove the member from ur group, in the interest of the group... n lastly, i do agree wit u tat equal growth is not possible always, but my point is tat disparity can be avoided...