Saturday, February 6, 2010

Why the Euro needs governance

The recent events which caused a turmoil in the euro area are not temporary shocks. They are the symptom of major imbalances in the world economy. After the housing and banking crisis speculative attacks are now directed to the huge deficits accumulated in the United States and Europe. Their significance is clear: 2010 (and years ahead) might be as bad or even worse than 2009.

The economic outlook is gloomy, to put it bluntly. In 2010 Europe will show a modest growth of less than 1% due to the effect of fiscal stimulus plans. As a result, deficits went on soaring to unsustainable levels close or higher than 10%; unemployment will rise to 8% but with considerable variation between countries (20% in Spain!). Should we care about a potential Greek default and of other EU countries? Greek GDP is about 2,5% of total EU GDP, Portugal slightly less and Spain around 10%; Baltic States and Hungary are also in a bad state. But, in theory, we are not talking in the Greek case of magnitudes that could cause a collapse of European economy. Therefore, we should not worry in theory about defaults of these economies.

In fact speculation takes advantage of that situation to push the euro down in respect of the dollar. Potentially, central banks of G7 economies could intervene to stop that speculative movement. Why don't they do so?

In practice, there are other more fundamental reasons. Germany is reluctant to rescue the default economies; the United States have a huge public debt, and the measures taken by the Obama administration are ridiculously insufficient to curb the rising trend. Under these conditions, it is unlikely that they would get involved in any operation to resolve the financial crisis in other countries, especially in Europe. The major risk actually stems from the US debt which to bring it to sustainable levels by 2012 would require around 3.000 billion dollars !

This is the real danger which threatens the world economy, opening catastrophic scenarios with inflation coupled with economic recession and further contraction of global trade and employment.

The Spanish Presidency is set to reinforce economic governance with the introduction of targets and sanctions as for the Stability Pact. But this is likely to be opposed by Germany and other countries which refuse any transfer of sovereignty in economic policy matters. The economic pessimism about the Greek situation has extended to other countries as the ability of single governments to aid the recovery of their national economies is put in question.

G. Verhofstadt, the leader of the Liberal group of the European Parliament keeps a very critical stance on the EU reaction to the crisis. He advocates for more integration and unity of Europe to restore sound economic conditions in European economies. If Germany and France would listen to the alarm bell, maybe Europe could still hope in its recovery.

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