The economic crisis in Europe is deepening and may get worse, with worrisome effects on the rest of the world.
THE economic situation in Europe has worsened considerably in the past week, giving rise to a very worrisome situation.
The ramifications of a full-blown crisis are serious not only for Europe but also the rest of the world.
The
recent
Greek elections saw the citizens proclaiming their anger towards
the austerity policies tied to the European-IMF bail-out package, by
repudiating the two major parties and giving the small anti-austerity
Syriza party second place.
The elections came in the midst of a
greatly deteriorating condition. Greece has 22% unemployment, 50% youth
unemployment, GNP is falling steeply, and public debt will remain high
at 160% of GDP next year despite the recent bailout and
debt-restructuring measures.
The leader of Syriza, Alexis
Tsipras, who swept to the forefront of
Greek politics on the wind of
protest against the austerity measures imposed by creditors, wants to
re-negotiate the terms of the bailout.
He thinks his insistence on this will eventually force the creditors to change the terms, with Greece remaining in the
Eurozone.
But
many analysts think that the response to this demand from the EU and
IMF would be to stop further loans and force Greece to exit the Euro. In
a second election in mid-June, Syriza is expected to do even better and
a messy Greek loan default and Euro exit are now seen as more than just
possible.
In a Eurozone exit, Greece would re-introduce a local
currency, and after Greeks change from their Euros, a depreciation of
the new currency is expected to happen.
News report indicate that
some capital flight from Greece is already taking place, as Greeks fear
that their present Euro-denominated assets would lose value after
conversion to the local currency.
Meanwhile, Spain was last week
desperately trying to avoid a run on banks after the government was
forced to partly nationalise Bankia, the second largest bank, followed
by rumours of such a run.
The value of bad loans held by the
banking sector rose one third in the past year to 148 billion Euro and
Moody’s downgraded the credit rating of many Spanish banks.
The
Spanish finance minister Luis de Guindos said the battle for the Euro is
going to be waged in Spain, implying his country is now in front in
trying to prevent the Greek crisis from infecting other European
countries and bringing down the Euro.
The spreading crisis throws
into doubt the policies in most European countries that have in recent
years focused on drastically cutting government spending to reduce the
budget deficit in an attempt to pacify investors and enable a continued
flow of loans.
This reversed the coordinated policy of fiscal
reflation that the G20 leaders agreed on in 2009 to counter the global
crisis. It contributed to the rapid recovery.
Since then
economists and politicians alike have been debating the merits of
Keynesian reflationary policies versus a resumption of IMF-type fiscal
austerity.
The movement towards recession in Europe as a whole
and deep falls in GNP in bail-out countries like Greece has boosted the
arguments of the Keynesians.
But key leaders such as Angela
Merkel of Germany and David Cameron of Britain are still convinced of
the need to stick to austerity.
The victory of the new French
President
Francois Hollande and the stunning polls performance of the
Syriza party in Greece indicate that the public wind has shifted
radically against austerity, and that a change may be on the cards.
The
stopping of loans to Greece would lead to an economic collapse, with
government debt default, bank runs, re-denomination of local contracts
to local currency and default on external contracts denominated in euro,
in a scenario painted by Wolf.
A Greek exit could trigger bank
runs and capital flight in Portugal, Ireland, Italy and Spain and
beyond, causing collapse in asset prices and large GNP falls.
A
decisive European response is needed, such as the
European Central Bank
providing unlimited loans to replace money taken out in bank runs,
capping of interest rates on sovereign debt, Eurobonds and abandoning
austerity-centred policies.
But if these policies are not taken,
the Eurozone may disintegrate, with one study suggesting GNP falls on 7%
to 13% in various countries, and if a full Eurozone break up takes
place there could be a freeze in the financial system, a collapse in
spending and trade, many lawsuits and Europe facing a situation of
political limbo.
The impact on the world would be worse than the
Lehman collapse. Though the implication is that this should not be
allowed, a Greek exit would greatly increase the likelihood of these
dangers.
If Greece leaves, the Eurozone will have to change
fundamentally but if that is impossible, large crises will be repeated
in a nightmare.
There would have to be a choice between a
stronger union of European countries (which many do not like) or endless
crises in future, or a break up now. No good choices exist, concludes
Wolf.
The scenarios and predictions detailed above in the Wolf
article are pessimistic, but may also be realistic not only because of
the current economic situation, but also the apparent lack of conditions
for a political solution.
Watching from the sidelines, with no
ability to influence developments, many in the developing countries are
disturbed by the turn of events. It will likely lead to a weakening of
the global economy at best and a full blown crisis at worst, with the
developing countries at the receiving end in terms of trade downturn,
financial reverberations, and declining incomes and jobs.
It is
apparent, once again, that a global forum should exist where all
countries can discuss developments in the global economy and contribute
their views on what needs to be done.
In the inter-connected world, policies and events in one part (especially in the core countries) affect all others.
Global Trends By MARTIN KHOR
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