The global economy has been in a state of crisis since 2008. It all started with the sub prime mortgage crisis in the US. It then spread to Europe because of the unsustainable debts of some euro zone countries, namely Ireland, Portugal and Greece. From there it spread to the Far East, where the hefty growth rates in China and India of approximately 9% and 7% are consequently faltering.
This crisis of global proportion has been exacerbated by the make-up of the euro zone single-currency mechanism. Despite the fact that the economies of the Far East are faltering and that economic recovery in the US is sputtering, the real eye of the storm is Europe. In this context, that means the 17-nation euro group, a sort of union within the 27-nation European Union.
The Germans and the French, who were the prime movers in the euro saga, wanted a single currency that would eventually lead to a Europe that was politically and financially united. Something akin to the United States of Europe.
The idea of a United States of Europe sounds fine.
After a millennium of wars, a political union seems like a good idea. A unified currency is part of any political union, but in the present circumstances they seem to have put the cart before the horse.
The euro has created major debt problems for some euro countries and zero growth for the area as a whole. Consequently, instead of accelerating the path to unity, it has created disunity. There are countries such as Germany, Finland and Holland that are financially robust with healthy and responsible fiscal policies, but there are those that are not so viable, such as Greece, Portugal, Italy and Spain.
Essentially, you cannot have a single currency unless you have a single fiscal policy. One does not go without the other. But a common fiscal policy means giving up a large chunk of sovereignty.
When the euro was adopted on December 16, 1995, very few member countries were willing to give up fiscal control. This has now changed to a certain extent. On December of last year the 17 members, met in Brussels and accepted in principle a German plan, which removes the decision making process on fiscal matters from the capitals of the individual states to a supra national organ in Brussels. The member states also agreed to submit their budgets for prior authorization to this supra national organ, to limit their current account deficits to 3% of GDP and to limit their debt burden to not more than 60% of GDP.
These far-reaching decisions were made to avoid the collapse of the euro zone, but developments in the past month have brought the possibility of the collapse of the zone nearer. Or at least of the euro’s becoming the common currency of the financially strong euro countries and the rebirth of, among others, the Greek drachma, the Spanish peseta, the Italian lira and even the French franc.
Greece is very close to financial collapse. It is experiencing a sharp decline, and the fall in GDP will make it impossible for the country to reduce its budget deficits and reduce debt and service, which means meeting payments on its debts. If Greece defaults, it will have a domino effect on the other weak members of the EU and will cause untold problems in France, which holds a large chunk of the Greek debt.
The December 9 resolution has yet to be implemented; consequently, the euro zone is going from one crisis to another. Since each member state has a different fiscal policy, different levels of debt and different levels of budgetary deficits, one of the major problems of the euro is its relative value as against the different member states. It is overvalued for countries like Italy, Greece and Spain and, to a certain extent, France and is undervalued for countries like Germany, Holland and Finland.
The common currency introduced a measure of unreality to government finances. A common currency beyond the control of the local political decision-makers should have encouraged a balanced budget because member states could no longer print money. But the opposite happened.
Some countries went on a spending spree and instead of printing money, they borrowed it. Their governments indulged in costly programs they could not afford, ran balance of payment deficits and had to borrow money to make ends meet.
They borrowed and borrowed, and the debts ballooned beyond their repayment abilities.
Hence the debt crisis.