Europe is on the brink of a major disaster. And this disaster is not one that can be attributed to mother nature, but rather the storm brewing is one based on their own fixation with long term solutions. Like many economists failed to predict the global economic meltdown and thus found themselves in this massive mess of their own making, the EU is headed on a path of similar disintegration, one that can be averted if policies are formulated to get their feet out of the present quagmire.
What European leaders need to realise is that they do not have months, or years to avert a collapse, but just a few days to take pre emptive measures for the vicious storm that is headed their way. Therefore at present the European leadership needs to ensure that they do what they can for the present, and leave the long term policies for later once this crisis is averted.
One misfired bullet is all it will take to spark a contagious revolt in Greece. In these troubled times where the survival of the euro and major EU countries hangs in the balance, the European leadership has collectively responded with a cacophony of proposals that aim to restore confidence. Hence we saw the president of the european central bank calling for stricter budgetary rules, head of the Bank of Italy and Trichet’s successor at the ECB advising binding budgetary limits, not merely for budgets but for a plethora of varying national economic policies as well. Then we see the collective chorus from many quarters calling for the creation of eurobonds. Unfortunately, what all these suggestions have in common is their failure to address the present dilemma.
Achieving consensus on eurobonds might take months or even years to develop. As for the stronger fiscal rules and a scrutiny of policies taking a toll on competitiveness, they will do almost nothing to prevent EU’s exposure from the broiling imbroglio. In these testing times the first and foremost step that EU countries need to collectively address is to aid in the provision of some bullet proof Kevlar for its banks. It is the uncertainty in the face of this brewing disaster, in the stability of the banks that has hit confidence the hardest. It should therefore not come as a coincidence that it was the same banks who found their stocks taking the first hit in the recent financial crash.
As Barry Eichengreen, Professor of Economics and Political Science at the University of Berkeley rightly pointed out, there are a number of ways to recapitalise vulnerable European banks. According to the professor, stronger economies such as France and Germany that have budgetary room for maneuver can do so on their own, while the weaker European countries can use European Financial Stability Facility as a crutch for their ailing economies. He further said that the IMF can contribute in the short term through the creation of a special facility, to supply some extra stimulus if needed to European countries a facility that matches funds put up by Asian governments and sovereign wealth funds.
It is expected that Greece, as I write this article might default, with authorities making superhuman efforts to stabilise finances and attempt to restructure their economy. Despite these attempts things look gloomy for the European Union with the unexpected departure of ECB’s chief economist Jurgen Stark that contributed to intensifying the looming fears of investors about the euro-zone. Such news led to an enormous pullback of risk from the European financial markets, leading to the euro sinking like an anchor in its worst fall for more than six months. Confidence has taken a severe thrashing in European financial markets that has prompted fears for rising unemployment, with consumers opting to curtail spending, and deepening fears for Europe falling flat on its face into a recession. Amidst such a dilemma, European policymakers need to realise the shortcomings of Greece to payback its debt, and give it some breathing space. The dismal performance of Greece to achieve its fiscal targets portends the scenario of IMF and EU withdrawing their support, giving rise to the possibility of default leading to the economic, social and political chaos that will ensue as a result. This scenario can be averted if meaningful debt relief replaces the debt exchange agreed to previously. While those repeating the rhetoric of a Marshal plan can do something meaningful by replacing their words with capital.
Economic growth is a prerequisite in the current dire straits. The future of Europe rests on it. An absence of growth will lead to unemployment, flailing tax revenues and contribute to eroding the ability of European countries to service their debts. Social and political security rests on this too. In the absence of growth, the stench of austerity measures will become too much to bear.
Therefore, in the face of falling consumer demand governments need to play their meaningful role in providing the necessary fiscal stimulus to spark economic growth. If Europe replicates the policies of the US, then as Keynes said, “In the long run, we are all dead,” will ring true as European leaders will sound their own death knell. However, if measures expounded upon are taken it will give European economies time, which will be needed to implement policies like budgetary rules, limits and eurobonds.
The writer is News Editor, Profit