The European debt crisis has donned the garb of that vicious circle that continues to tantalise and torment the thinking heads around the globe, simultaneously. Gulping Portugal, then Greece and the latest one to take a plunge; Italy – the problem has showed no signs of easing up. The year 2011 was being touted as the year when the European hierarchy got their act together, and came up with the solution to the recent to fix – as time told so cruelly for the Europeans; that wasn’t to be. The Greek tragedy evolved into a south European crisis, which then went on to became a pan-European dilemma. And at the tail end of 2011, the economic picture was unmistakably gloomy. And to those who flaunt the ‘inevitability’ of the chain of events, should take into account the blatant failure on the part of European leaders to curtail a couple of vicious spirals – which eventually culminated in the aforementioned vicious circle.
The first spiral traces its origin to the public debt to the banks and back; which also gave birth to doubts over the ability of the governments to service these debts, and this in turn absolutely pulverised any inkling of confidence that Europe’s banks might have had. The banks weren’t able to lend for obvious reasons, which resulted in the weakening of the respective economies and eventually the bond prices further fell – to pour more misery over the damaged European banks. The European Central Bank seems to have controlled the spiral some what via guaranteed liquidity for three years, but the doubting Thomas still believes that ECB’s actual agenda is alluring banks into buying the troubled countries’ bonds. Considering the fact that ECB’s provision of unlimited liquidity doesn’t actually solve the targeted debt problem, one senses the rationale behind the claims that ECB’s maneuvers are intended to cater to banking problems instead of the debt issue. Spiral number two covers fiscal consolidation and pedestrian growth. Tax augmentation and truncating public spending are still very much needed. There would come a point, inevitably, when recession and unemployment might instigate a political reaction, and of course uncertainty about the future governments wouldn’t exactly be a reassuring tonic. To counter this second spiral, growth is the segment that should be earmarked and worked upon, even though the external environment is not exactly favourable.
So what exactly is the way forward for the Europeans? Enhancing growth would require a two-pronged approach – one that caters to both supply and demand. Now, considering that SMEs (Small and Medium-size Enterprises) are the driving force behind the creation of job opportunities, ECB’s endeavour to restore liquidity to the banking system becomes absolutely pivotal. The governments as well, would have to do more than just chipping in to ensure that the supply-side measures are taken care of. There is a dire need of countering the interest groups that are becoming a major hindrance in the path of individual and collective recovery of the Europeans and covering this particular base would allow economic growth to finally take center stage in this European drama.
And of course, satisfying all stake holders would be a Herculean task; and while many a Hercules have performed this task in European history, it would take an unprecedented – at least in the recent times – level of understanding on the part of individual units if Europe wants to drag itself out of this fiscal fix. For this task Europe’s social model can become an archetype. All the stakeholders must be brought on a common platform, and the one that loses out must be given its due compensation; and building on from this mutual understanding, the goals – that seems improbable as this piece is being scribed – might finally become tangible realities.
Another important façade worth considering is the fact, that merely cutting interest rates wouldn’t make things fall into place. Upping asset prices and lowering euro’s exchange rates will result in ECB buying bonds on secondary market. To cut to the chase, the matter would then require quantitative easing. Europe can come out of its predicament if all the individual nations and the respective stakeholders do their jobs properly; keeping in mind the greater good of the entire continent and not only nurture the vested interests.
The writer is King’s College London graduate and currently employed as a financial consultant at Privitisation Commission, Pakistan.