July 24, 2012
Italy is the European state having 10 of its cities declaring incapability of payment serving. Span’s 10-year bonds are regularly getting underrated in the market decreasing the credibility of the country’s public finance status. Greece is ready for negotiations with the troika hoping to receive a new deal in order to pay pensions and public insurance funds in the months to come. Cyprus is resorting to the IMF and the European Central Bank for a rescue plan as it cannot control recession. Portugal is standstill trying to avoid bail-out package though tough austerity measures. If this is not a domino effect, what is it?
The spreading of the crisis offers a we-held counter-argument against all pundits and market experts having pointed out that the crisis would not affect stable economies. But who is finally stable as the contagious character of recession hits every banking system exposed to toxic assets and every economic policy that is structurally weak and inadequate to provide solutions? Three years ago who would expect that Berlusconi’s Italy or Zapatero’s Spain would be in the center of the cyclone unable to shift developments in favor of their economies. During that period Greece was the black ship and everyone was rushing to condemn it. Yet all these “Messiahs” hoping to put all structural deficiencies of the crisis in the shoulders of Greeks are now faced with equal deadlocks. Pity to say, but yes, the European Union and the European Central Bank have not predicted this contagion despite striking macroeconomic signs of its member-states.
Along with the missing macroeconomic targets of the overdebted states and the unwillingness of the European Union and the Commission to alter its policy putting emphasis on growth packages, the wider sharing of available rescue funds from the EFSF and the European Stability Mechanism creates additional problems of management. What member-state will finally receive the largest package and for how long the European Union and the European Central Bank will be able to support both mechanisms as long as no signs of sustainable growth are expected?
According to these remarks, I tend to believe that the European Union has to deal with one of the three following scenarios:
1. Either tighten rescue package clauses for growth in order to press governments move towards privatizing traditional areas of state interest, lower tax rates, and combat tax evasion. This shift would attract investments from abroad, lower the cost of public spending, and minimize the effect of cuts upon pensioners and low-income employees.
2. Start discussing the idea of building a regional currency union inside Eurozone. This Union would consist of states with similar structural deficiencies in South Europe where the single currency would be partially depreciated with deadlines of return into the single currency when conditions leave space for it. Therefore, in lack of state-led monetary policies, the Mediterranean states will be able to deal with their debt more efficiently by adopting a new currency called “euro1” that will be attached to euro with exchange balance rate of 0.5/1. With this currency rate regulation, the overall debt of each member will be diminished to half and overdebted states’ economic policies will alter their credibility and growth prospect forecast in the markets bringing fast-track reforms and attracting short-term investments (i.e. I will come back to this proposition in the next days).
3. Or initiate a Global Summit that will bring together G20 but also states facing the risk of bankruptcy like Greece, Portugal and Cyprus in order to discuss a new global order. This scenario is the least privileged for Eurozone as the EMU will admit its structural problem and will lose ground against dollar in the global transaction currency race. Nonetheless, it might also seem a quite effective one as global economic players and unions will accept the global character of the crisis and its consequences and assume the burden-sharing of bringing reforms and control a further widening of the crisis side effects. From this perspective, all leaders will be faced with the well-covered notion that a possible collapse of Eurozone will not only destruct the European Union itself, but will equally sweep the entire financial system as extreme inequalities and unprecedented social unrest will rise around the globe.
All things considered, I do hope that stubbornness inside the European Union will slowdown and pioneering actions will prevail. Otherwise we will be faced with escalating conditions that have never seen the light before.Dimitris Rapidis