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.