But fasten your belts. Here I go again. My excuse is that this crisis keeps surprising the imprudent. There is so much to say that I will have to have several bites.
Until we can find solutions, that I shall examine later date, first of all the causes. What the euro crisis? Because it was fundamentally flawed in its creation. Only, good luck, informed economic management and strong economic growth could hold together. In fact, the euro area had to undergo the opposite of all three.
Abandon sovereign currencies is a real challenge. Exchange rates act as a safety valve. When you delete them, pressure has reduced, or he will find another way. In a system of fixed exchange rates, as the ERM currency speculation could and brought out of the system. Supporters of the euro project drew comfort from the fact that, by contrast, a full monetary union is immune against such attacks.
It was recognized that economic and financial pressures could find yet an as countries which have diverged from base to face higher bond yields. But it would be a good thing. The prospect of it should be used to retain. He was not imagined, however, that the strain in the bond markets may threaten the stability of the euro itself.
Four things went wrong. The first two were failures of the private sector. First of all, far from responding to their newly chained State, Spain and the Ireland went on a private sector spending spree. (In the same time, in Greece the Government leads the bonanza.) Second, in all these cases, bond markets were desperate to predict potential and difficulties imposed yields slightly higher than on the Germany. As a result, they have not provided any restraint at all.
The third and fourth were failures of the Government. Authorities chaired a banking system extremely precarious, extremely vulnerable to shocks. And their policies over many years resulted in a public debt higher GDP, not only in the countries of the periphery, but in the nucleus also so-called solid. In common with almost everyone, the European authorities grossly underestimated the possibility of sovereign default as a realistic concern of the threat and the market and underestimated its ability to cause a banking crisis of full scale.
The fact that the political elite ploughed on the euro project was the result of the profound arrogance. Where possible, electorates would not be an opportunity to say if they approved the euro and other aspects of integration. When they had to have their say, they would be forced to move to the vote until they said "Yes". The current crisis has the same roots. The project difficult economy could be overcome by the policy. The establishment of Brussels would ensure that all which revealed any right.
But he did not. The economy now threatens to overwhelm the policy. The sovereign debt of the Greece is so high that it is impossible to see how it can honour its debts without outside assistance (ie. gifts). And the economy will go in contracting for years. It should be "an event". The only questions are when it will happen. who will pick up the tab; and what it will be called.
The European Union, nomenclature is extremely important. Of course it is called a default--I doubt, it will be called anything from "of". Bad things begin by-such as the decline and defeat. It will be called something beginning with "re". Good things begin with "re", including the rebirth and renewal - and restructuring and report. But by default, it will be.
Who picks up the tab is important because the Bill could seriously against the banks. Remarkably this threat includes the ECB itself because it took on a large amount of Greek debt. The lines on the Bill are likely to delay any kind of solution and to poison the atmosphere between the Member States. During this time, the fate of the European banking system will be suspended by a thread.
That is why the "when" question is so important. The current approach is to try to prevent the event until the situation improves. You will notice that this is a striking similarity to the sophisticated strategy adopted by British banks to property loans commercial dud, namely "delay and pray". Mr. Micawber had the same idea but expressed differently.
Therefore even if markets can cause the euro break by pressure from Exchange rates, they can cause an internal financial crisis worse than any panic of the currency. Perspective, or the reality of this crisis could cause yet some European leaders precipitate the end of the euro, as we know it.
Roger Bootle is Director General of the capital economy and economic adviser to the Deloitte.
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