EUROZONE says "HELP!!!!"

The Greece crisis or to put more rightly the anchor for Euro crisis is seen as result of excess spends and no saving attributes of the country. The sore public spending, done blindly out of the borrowings, thus, leading to a crisis of unmanageable debt on such a large scale. Greece total Debt mounting to 329 Billion Euros and total debt in % of GDP being 165.6% , highest in the modern history.

Let us analyze some of the suggestions made by Financial Times columnist Martin Wolf: “Thinking through the unthinkable “

a) Restoration of external competitiveness and economic growth

One way to achieve it is through aggressive monetary easing, i.e., devaluating Euro to increase competitiveness. Weak Euro will raise exports. Strategically it will help core to move out of periphery into the international market to balance out the asymmetry caused by current euro crisis. Within the Periphery (PIGS nations) it is the structural imbalance which is major reason for widening productivity gaps. There is an urgent need for major structural reforms to fuel innovation and growth in public-sector productivity to meet its own domestic demands and not completely depending on Core for services and products.

b) Deflationary adjustments in periphery

Other important step on periphery front would be taking stringent austerity reforms to tackle the imbalance due to overspending within the country.

However the Austerity measures to contain spending should not affect the price directly like- higher interest rates as a reform measure. We know Interest rate changes should satisfy both high investments and high savings.

In current scenario direct price adjustments like increasing interest rates may be useful for periphery to control spending as:

·        Borrowing will become expensive,

·        Consumers will postpone consumption,

·        Thus containing the spending and raising the savings.

But dampening consumer demand will have adverse impact on core as supply will be affected directly driving out investments and thus decline in productivity.

Government needs to restrict the spending power through other cut measures like cutting nominal wages, scraping tax exemptions, imposing luxury levies, cutting down on benefits, cap on bonuses, pensions, reduction in subsidies ,etc. And these austerity reforms are needed across the board for everyone and not the bourgeoisie class only.

But drawback can be an unrecoverable spiral deflation which will further lead to sector shrinks, leading economy to collapse further.

c) Financing of the periphery by core

Looking at the third solution it is more idealistic assuming that financing alone will help periphery recover. The bailout “rescue packages” (so far 2 bailouts for Greece) has only proven not tackling the crisis, but only postponing the inevitable fall out.

d) Debt re-structuring and partial breakup of EU

Another solution seen can be ECB writing off debts and investing in the non- operational but productive assets to revive country’s economy. Will such action bring out the desired outcomes again doubtful itself, as apart from political wrangling and structural imbalance, growth is also slow because of loopholes in work rights enactments like generous pension benefits, unemployment allowances, etc. without any corresponding increasing productivity thus weakening the economy  further.

For sake say one other way of re-structuring is- Core like Germany proposing buyout. But “colonization” means Greece losing its sovereignty and in current scenario with Greece at advantage, it can rather choose to step out of euro Zone and other Eurozone countries may follow suit. While countries will move out of the Euro Zone easily, debt will still remain and pile up on ECB.

With no particular solution yet in hand to help resolve, Questions still remain wide open to be answered like:

Should Greece fiscal failure to be blamed solely or the EU Core (Germany, the Netherlands, Austria, and France) equally to be blamed for prompting and propelling the purchase power in periphery resulting in a crisis this big?

What are the Country specific solutions that are needed to answer the problem?

What  common solutions /measures on the whole inclusive of all EU countries needed to be undertaken which has  provisions to make sure that future defaults of other Eurozone countries could be contained in initial phase itself ?

Posted by: Malvika Marwah