Europe in financial crisis – Brussels takes action against Greece
The European union is becoming unstuck. Those who were against this union, it seems, are being proved right, especially with the financial collapse in Greece. Last week Brussels took a hard line with Athens and Greece has been told that it must cut costs drastically under close European Union supervision. The risk premiums for Greek government bonds have risen drastically, which means that the country must pay higher and higher charges.
At least two other countries in the European Union are in trouble – Spain and Portugal. At this point in time these countries are being eyed with mistrust, whilst at the same time speculators are betting that bonds will continue to fall, and that these countries will not be able to continue borrowing money. They are in jeopardy of having their credit downgraded.
These actions have their own risks, and are putting in jeopardy the future of the European Union. If the trend continues then the monetary union itself could eventually collapse.
According to Nolling from Brussels, doing nothing is not an option. Greece, Portugal, Spain and Ireland must act now to drastically reduce their debts.
Der Spiegel reports:
The Commission doesn’t hold Greece solely responsible for the current euro woes. Experts close to Economic and Monetary Affairs Commissioner Joaquín Almunia say nearly every participating country is compromising the cohesion and stability of the common currency.
“The combination of decreasing competitiveness and excessive accumulation of national debt is alarming,” the experts wrote in a recent report, adding that if the member countries don’t get their problems under control, it will “jeopardize the cohesion of the monetary union.”
Differing economic development within the euro zone and a lack of political coordination are to blame, they say. In the more than 10 years since the euro was introduced, the Commission states, it has become clear that simply controlling the development of member states’ budgets is not enough. What that means, more concretely, is that the stability provisions stipulated in the Maastricht Treaty to regulate the common currency aren’t working, and member states need to better coordinate their financial and economic policy measures.
The European Union officials are watching with alarm as various countries with the Euro-zone struggle with their lack of competitiveness. Countries such as Germany, the Netherlands and Finland have current account surpluses along with high budget deficits.
You can read the whole of the Der Spiegel report here:
Europe is very much into socialism – the welfare state. Countries such as France have a huge number of unemployed people. If tax receipts are not matching outlays with regard to government budgets, then those deficits are inevitable. Greece has a problem for a variety of reasons, including a highly unionized population that goes out on strike very easily. In recent times there have been a large number of demonstrations in Athens. The Greeks do not like the idea of having to tighten their belts and accept that changes are necessary because of the financial collapse of their economy.
One possible reason for the very shaky circumstances that now exist is the reaction to 2008 global financial crisis. That deficit spending which was lauded as being necessary to stimulate demand has had short term, and very likely long term consequences in the European Union. As a result of this reaction debt skyrocketed in Europe. For example last year Spain’s budget deficit reached 11% and that of Greece reached 13% and that is not sustainable in the long term.
As a result of these high deficits Brussels has intervened, and now these countries must face taking drastic measures and they must balance their budgets whilst simultaneously creating more competition on the labour and goods markets. The changes that need to be made include employees having to scale back on their wage demands; civil servants will face a cut in wages. One might ask what has caused this situation, is Germany to blame? Some of those countries now in trouble are blaming Germany, but in reality they need to have a long hard look at their own expansionist policies that have brought about this potential collapse.
The situation that now exists is very similar to the situation in the 1970s when we first encountered stagflation – that is the combining of high unemployment and high inflation at the same time. No country should adopt policies of government expansion without the necessary increase in taxation receipts. At the same time, these governments need to be aware that there are limits beyond which the population will revolt against taxation increases – or in other words there is a flight of capital that contributes the long term consequences of these expansionary policies i.e. stagflation.