Coercion works! Below find Barb's take on the inflation vs. default issue
What this European Debt Crisis has highlighted for the world to see is the need for a massive financial, political and culture restructuring of the PIIGS countries (Portugal, Ireland, Italy, Greece and Spain). Heck, Germany can print all the money it can to support the national debt loads of the PIIGS, but we risk hyperinflation during a recession. For a country with an overleveraged balance sheet, all-out austerity measures are usually ineffective. By cutting back government spending, you risk a deep recession. The best current example would be Greece, where the significant interest rate hike to compensate for the higher sovereign risk has prevented economic growth from keeping pace with the rising cost of servicing its debt. This negative effect is further heightened by government budget cutbacks, which has the result of stagnating innovation and growth, which is crucial factor in bringing about the much desired recovery of the Eurozone nations.
Ultimately, I think the hurdles to the solution are not strictly financial but political and cultural as well. On the surface, each euro zone nation may be facing a sovereign debt crisis. However if we were to take a closer look, the root cause is very different. For instance, we take a look at Greece’s inability to collect on taxes, track record for fudging its numbers to stay in the Eurozone and its history of corruption. All these factors, amongst many others, contributed to the collapse of the Greek economy. What use is there to bail a country out if you risk the same mistakes being repeated because the culprit has not reassessed and resolved the very issues that led to its downfall?
I think the real question here is whether Germany wants the PIIGS to remain as Eurozone nations. I believe the obvious answer is that the public sentiment is that no one wants to work to cover other people’s f-ups. Why would anyone want a budget cut in their home country in order to bailout another nation?
On the other end of the equation, the consequences of a disintegrated eurozone could be costly. The departure of even one nation, raising fears that more would eventually follow, would affect credit conditions across the Continent. The departure of even one nation, raising fears that more would eventually follow, would affect credit conditions across the Continent. Tough call – we have tons of priorities but very little time before we face another mass-market pandemonium.
Great insight :) I agree, that's probably what Germany is thinking ("they dug their hole, let them sink!"). However, a brisk reminder of WWII often is all it takes for Germany to gloss over their thoughts with a politically neutral tongue. But it's not so black and white, a bail out for places such as say, Greece doesn't necessarily help individuals as much as banks that held the debt (i.e. banks such as the German ones). It's in Germany's interest to protect foreign sovereigns because their banks are exposed.
ReplyDeleteI think Germany is weary of stepping further in by rejecting the "Eurobond" idea - one bond backed by all Euro nations (i.e. Germany would end up guaranteeing funding that would be beneficial to all countries). Although France and Germany are attempting to push for the other countries to get their fiscal houses in order, it's a long road ahead.
I agree with you Barb, and Michael Lewis who cleverly point out that it's not an easy fix because of deep rooted causes other than just financial credit this, financial markets that.
Man, what Berlusconi would give to be back in his sex scandal era (the "good old days").