Who is at fault here- EURO or Union? The golden question –was it a mistake to accept EURO as a single currency? I seriously don’t feel that EURO was the problem here. Kindleberger book titled “manias crashes and panics” rightly state that it’s GREED that kills one and his/her country’s future. These over leveraged countries were facing some tough time in 2000. They started borrowing heavily through some financial instrument (which led to downfall of US economy) and other external ways. It was all going good until Greece realised they have mismanaged their accounts for quite some time now and the world should know about it. They totally disregarded the pledge they took under Maastricht treaty of having 60% debt to GDP ratio. If EURO was helping free flow of money, these economies used it to such extent that it became difficult from them to ride on this. When you have a monetary union you should also have fiscal union. Germany had strong fiscal policy but PIIGS don’t.
Columnist Thomas L. Friedman wrote in June 2012: “In Europe, hyper connectedness both exposed just how uncompetitive some of their economies were, but also how interdependent they had become. It was a deadly combination. When countries with such different cultures become this interconnected and interdependent — when they share the same currency but not the same work ethics, retirement ages or budget discipline — you end up with German savers seething at Greek workers, and vice versa. Who is affected? There are many sovereigns and private institutions that are affected by this debt crisis. Many countries invested their money as the RISK was pretty less as countries were part of one monetary policy. The reason why Germany, France are putting efforts is because their banks have lot of money invested across European Union. A default will push their economy into trouble. The amount of borrowing between private players and government is very high. Few figures (in billion Euros) dated 2011: Italy 2.8 2.9 22.3 28.00 US 6.2 34.8 3.9 49.6 39.8 134.30 UK 9.4 54.7 18.9 74.9 104.5 262.40 Germany 15.9 120 26.6 131.7 82 376.20 Japan 32.8 20 15.4 68.20
Country/ Borrowed from Greece Italy Portugal Spain Ireland Total
France 41.40 309 19.1 112 23.8 505.30
Spain 29.5 65.7 95.20
Portugal 7.5 19.7 27.20
As you can see US, France, UK and Germany had quite a lot of money stuck in PIIGS. The irony is Germany, France are contributing to EFSF, ECB to save themselves and the union. This is called Financial Contagion. If Greece had defaulted in November 2011, close to 83.2 Billion EURO would have been wiped off. That would have created huge pressure on Germany, US, UK and France. What happens now? The troika of European Commission, the International Monetary Fund and the European Central Bank is certainly putting lot of efforts to close the deals. Many private players were and will be asked to write off their debts. With EFSF being poured with Euros debt crisis will be over in near future.
Certainty is still not certain. Still a ray of hope is alive. But the big question is – Is the lesson learnt?
Credits: Sanleen N. Pal Great Lakes Institute of Management
February 2013
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