Monday 12 December 2011

Problem solved?

While the rest of the world looked on with hope that the summit in Brussels would result in a credible solution to the debt crisis and to preserve the euro, one thing became apparent. Why were we so optimistic?

The deal agreed by European leaders (except Britain who vetoed the changes as it was supposedly in 'their interests') will lead to closer fiscal integration for the single market and, according to prominent euro-zone figure, hopefully lead to the restoration of confidence in the euro. It is the belief by the newly name duo 'Mercozy' that the introduction of  a 'Golden rule' into euro zone's members budgets, together with automatic sanctions for stepping out of the fiscal line, will show investors that the future of the euro is secure. However government deficits are only part of the problem of the current crisis, in which the future growth of the single market is rapidly becoming the main cause for concern.

Growth is sluggish throughout Europe and shows no signs of improving any time soon. With unemployment rising to 10.3% in October, the manufacturing sector contracting and the prospect of a recession in 2012 looking even more likely, stimulating growth should have been high on the agenda of the leaders. Alas not. The dominant view that austerity is the way forward across Europe is one that is likely to do more damage then good. Reductions in public sector spending will not solve the problem's of the overspending of the past, it will only push economies further adrift from prosperity.

Furthermore it is well known in that to pay debts you need to be receiving an income (or by borrowing even more!). And without growth leading to job creation and increased tax revenues, where will governments get this income to pay off their debts?

The answer is a growing private sector, according to many dealing with the crisis. However leaders must also remember that it wasn't just governments overspending that got us into this predicament but the private sector as well  Before the crisis hit, the Spanish and Irish governments were running budget surpluses and had low debt levels. But the flow of private money into private banks fed to to them running large current account deficits which further inflated housing bubbles in both countries. The collapse of which has left both countries in ruin with the former being bailed out to the sum of £77 billion and the later hit with unemployment levels reviling that of the Great Depression, with youth employment over the 40% mark. The need to focus on current account surpluses is one that would prove difficult on the ideological grounds the euro was built on . As it would put government's in a position in which it would have to judge which capital flows are 'good' and 'bad', unthinkable for for the EU's free market advocates

There are many reasons to for us to still be worrying about the survival of the euro. The stance of the European Central Bank (ECB) being one of them. The continued refusal to be the 'lender of last resort' for euro-zone countries is one that continues to result in market instability. While the president of the Bank, Mario Draghi, announced this week that the ECB would continue to help banks to try and restore lending. He ruled out the bank bailing out any troubled state, causing stocks to tumble again.

A credible solution to the crisis does not appear to be reached any time soon, with the survival of the euro still hanging in the balance. What does appear certain however is that the path 'Mercozy' have decided to put Europe on will be a harsh and painful for all nations involved. The time of austerity awaits...

Author: Thomas Viegas

4 comments:

  1. Is your real name Carrie Bradshaw? The start to the blog sounds like the beginning to an episode of sex and the city... the content reads like it was written by a dumb blonde New Yorker...

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  2. Thank you for drawing comparisons with me and a very successful, albeit fictional columnist. My style is one which I hope is easy for people, not just economic students and economists, to understand. While I enjoy reading the Financial Times, its style is one which I feel is for people with a more advanced understanding of economics. From your stating and defining of economic terms on one of my other blogs, I am left wondering whether you have gone through studying the science just accepting what you've been told or actually delved deeper into the subjects consequences for society. Maybe you should.

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  3. You need a comma after albeit.

    It's rather ironic that on your previous comment you suggested some further reading for me, despite clearly being a big fan of independent/original ideas.

    I have a question for you: is there anything in these blogs that is remotely ground-breaking/individual?

    I dare say not.

    If I may be so bold, perhaps you could change the name of your blog from "A Younger Perspective" to "A First Year University Economics Students' Perspective?"

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  4. I hardly think that it is ironic that I recommended further reading as I do not think you clearly understand the assumptions behind the ideas that you so strongly believe in, just because you have been spoon fed the ideas when young. You have just accepted what you have been told. Just spouting 'free' market rhetoric to me will not be something new.

    By being the one who is writing a blog based on my reading, learning and actual observation of the world around me I would dare say I am slightly the more individual out of the both of us.

    Correct me if I wrong but I dare say that I never claimed this blog to be ground breaking. It really does seem that you have a problem with reading and understanding words.

    You may be so bold but I won't take up recommendation, however if I could make one. To take a look at the real world and not the theoretical one in the textbook and maybe if it isn't too much of a stretch say write a blog. But looking at your previous comments, it probably is.

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