Can Europe Revive and Euro Survive?

In last week edition (i.e. 11.11.2011) of Economist an Article entitled "Staring into the Abyss" with sub-sentence "The Euro Crisis might wake Europe up. But more likely, argues Edward Carr, it will be lead to compromise and decline". The article gives us more clear picture on the on going Euro Crisis and how Europe should take necessary steps to get out of the crisis. The authour says that "The euro zone still has the capacity to stop this run on its banks and governments. As a block, it is less indebted than America and its public-sector deficit is lower." and also he feels that "It has the money to fortify its banks against the default of Greece—and Portugal and Ireland, if need be. And it is minded by the European Central Bank (ECB), which can in principle stand behind those vulnerable governments by buying their debt in unlimited quantities on the secondary market." 

The authour further states that "While the world waits for Europe to make up its mind, catastrophe is in the air. It could take many forms. A country might storm out of the euro—which the treaty forbids, but who could stop a determined government? European banks might suffer a fatal loss of confidence. Italy or Spain might become unable to borrow on decent terms. Or a government trying to impose austerity might be replaced by one that rejects it. Any of these could cause contagion and plunge the world economy into depression." In the article, it is stated that ' ...... writes David Marsh, authour of a history of the Euro, "Europe's Melancholy Union." ' It concluded that "Can Europe turn back from the abyss? Only if the core countries will support the rest as they submit themselves to radical political, social and economic reform. Nobody should be under any illusions about how difficult that will be." 

My Reflections

The present Euro crisis is becoming deeper with vigour. The ongoing Euro Crisis will be one of the biggest crisis ever happened in the history. Before going further, I would like to quote few important phrases and quotes.


I remember the quote of Friedrich August Hayek in his paper (later published as a book) entitled "Denationalisation of Money - The Argument Refined". The paper/book was An Analysis of the Theory and Practice of Concurrent Currencies. In that paper/ book, F.A. Hayek had mentioned that

"During the Middle Ages, however, the superstition arose that it was the act of government that conferred the value upon the money. Although experience always proved otherwise, this doctrine of the valor impositus was largely taken over by legal doctrine and served to some extent as justification of the constant vain attempt of the prince to impose the same value on coins containing a smaller amount of the precious metal." (chapter III, The Origin of the Government and Prerogative of Making Money)

As we all know the fact that the Euro was introduced coercively & its purchasing power is determined by the group of experts. If we re-read the above paragraph of Hayek then we can understand  clearly what exactly happens when we move from one currency to the other (whereas here, in case of Euro, many currencies to one singly currency). It's not easy to determine the value of purchasing power when group of countries moved to one single currency, yet, we should really appreciate the Euro nations who had done it more tactfully without any haphazard, esp., at that point of time. 

As I quoted earlier somewhere in my earlier posts, that in 1999, the year leading up to the launch of the euro, Milton Friedman stated that he did not believe the Eurozone could last ten years and even as late as December 2005 (less than one year before he died at 94 years of age). He said that  

"The euro is going to be a big source of problems, not a source of help. The euro has no precedent. To the best of my knowledge, there has never been a monetary union, putting out a fiat currency, composed of independent states. There have been unions based on gold or silver, but not on fiat money—money tempted to inflate—put out by politically independent entities" (Interview with New Perspectives Quarterly Magazine, 2005)

He also stated (after one year of launch of Euro) that 

"If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give it time to develop its troubles."

Now, coming back to my reflection of existing crisis, still many economist believe that Europe have more resilient and also believe that Euro may survive . No doubt that (as the authour of the above mentioned article said) "Euro zone has the money to fortify its banks ...... ", but, the spread of crisis had already become wider. If Euro zone should come out of this crisis (remember the recovery cannot be quick) then   the major countries of the Euro zone should make more sacrifice  and should give complete support to the suffering nations. But these cannot happen easily, because, no Euro zone countries (as of now) are ready to support the crisis affected nations and they don't want there countries to suffer.

Two important things should happen if Euro wants to survive, as I always said earlier, Greece should default. Many people may feel this is too pessimistic view, but, if this does not happen now, it will happen later and that will affect the Europe and Globe severely. Secondly, the major Euro zone countries should  fortify the banks in order to give more support and save other weaker nations (except Greece, because the spread of crisis is much deeper than what they expect to be). Even if they follow these steps, we cannot say that the Europe will revive and Euro can survive. 

As the proverbs say "Time is the Healer; Time is Great Physician", so only time can say whether Europe will revive and Euro can be saved. Let's see how the Group of Experts act to save Euro and Europe.

Europe is in Jinx - Greece should Default!

Europe, Europe, Europe!!!!! Europe is everywhere in the news for the past few months, since Greece Crisis. The Trouble is creeping up faster than expected and faster than inflation. As everybody knows that it was started in Greece and spreading rapidly all over Europe now. Yesterday (i.e. 31.10.2011), Organisation for Economic Co-operation and Development (OECD) slashed its growth forecasts for some of the world’s biggest economies. It said that the “without decisive action the outlook is gloomy”. At the G20 Summit the OECD had warned that bold action needs to be taken to ward off another recession in Europe.

In its forecast, OECD said that the economic growth in the Eurozone would stall at 0.3 percent next year but only after just 1.6 percent growth in this year (the current forecast is down from the OECD’s May forecast of 2 percent growth in 2012). It is believed that this will remain weak in the US, while emerging markets will see slower growth than before the financial crisis began. It also said that the growth in G20 nations will have a gradual decline of 3.8 percent in 2012 from 3.9 percent this year, although it is expected to accelerate to 4.6 percent in 2013. The OECD added that the scenario could be worse if the Eurozone rescue deal fails to restore confidence in market. 

In its appropriate policy response it suggested the following to resolve the Euro area crisis: 

1. Important to clarify and implement fully and decisively the measures which was already announced. 
2. It should break the link between sovereign debt and banking distress.
3. To deal with Greece.
4. Europe should ensure that the sovereign debt crisis does not spread to other European countries.
5. To secure appropriate capitalisation and funding for banks

It further added that “Detailed information is needed on how the package will be implemented” which was announced last week (i.e. on 26.10.2011) to resolve the crisis.

My Reflection:

I am not surprised by the OECD forecast, but, I am surprised by the policy response for the crisis. If one follows the European crisis from the beginning then one can easily point out some of these policy responses without any further analysis of the present condition. What really startled me was that the OECD, being one of the world reputed organisation, had made such naive suggestions as a policy response to Euro Area along with a note that detailed information about the package is needed on how it will be implemented. Many of the people, not only from Economics background, know that if Europe wants to move from crisis then it has to deal with Greece and it should stop the sovereign debt crisis spreading to rest of the European countries. It is really astounding to hear these things from a world reputed organization. I know that I am not expert on any of these lines, but as a student of economics and also the person who follows the happenings I feel that something can be added. They are as follows: 

1. If the Europe needs to avoid another recession, then the foremost thing it has to do is to strengthen its banking system along with sound monetary policy (keeping in mind that one policy is for all the Euro countries, so more careful measures of policy needs to be taken). 

2. To restore the people's confidence in the system, the policy measures should be in such a way that it should generate more employment and also should stimulate the investment activity in the economy.

3. The foremost thing which I feel should happen at least now is allow Greece to Default. I again repeat the quote of Ludwig Von Mises, from his book Human Action, "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."  

Perfect quote, "..... a voluntary abandonment or later as a Final and Total Catastrophe ......." , even though he said this for credit expansion, this  is perfectly suitable for Greece considering the depth of the current crisis. The time has come and it is now, that Euro should allow Greece to default else the entire Europe will definitely fall in another recession which may lead to another global crisis soon. Let the time and the policy makers decide the fate of the Europe and the Global Economy.