Friday, February 08, 2013

EURO: IMPACT OF SOVEREIGN DEBT CRISIS

The ongoing sovereign debt crisis has revealed major cracks in the foundation of the euro. Though EU has suggested an amicable solution, it’s definitely not going to work. B&E gets questions answered by the European Central Bank and other experts by Manish K Pandey

It’s not as if the EU, or Jean-Claude Trichet don’t realise this. In fact, with regards to fiscal policies, ECB has already called for decisive actions by governments to achieve a lasting and credible consolidation of public finances. Jean-Claude Trichet, President, ECB, mentions, “Of course, it also calls for responsible attitudes as regards the three major areas, namely fiscal policies, which are a national responsibility, structural reforms, which are also very largely a national responsibility, and, although this is an oversimplification, the appropriate monitoring of unit labour costs.”

When Economic and Monetary Union (EMU) of EU adopted euro as its sole legal tender on January 1, 1999 the major mistake that it made was that although it integrated currencies of several Euro Zone members, it left their fiscal policies completely uncoordinated. No doubt, there was that convergence criteria which specified that a country could become a member only if its fiscal deficit was less than 3% of its GDP and its public debt was less than 60% of GDP. Seems all fine, but once you entered the EU, it seemed you could throw caution and these rules blithely to the wind – Spain, Portugal and Greece being keynote examples.

In fact, this exact issue was one major reason that forced UK to stay away from the euro. The country had even warned the EU off a colossal mess in the future, were the EU to continue not enforcing the debt/deficit requirement post membership of the nations.

Today, the situation has worsened such that the European Commission is now even proposing to centrally reinforce economic governance in the EU, which means that the member states will have to submit their national budgets to the EU for approval. No doubt, this, to some level can fix the problem. But the fact is that this quite simplistic diktat doesn’t even stand a chance – given the deep egotistic behaviour that member states, led by stalwart France, have shown very evidently in the past, which proves that they would never be ready to surrender their so called national sovereignty. It’s not only the fact that the moment a nation loses control over fiscal decision making, it ceases being a standalone nation, but also about the fact that even if national heads agree to this ‘solution’ (they won’t, but still, if), the taxpayers would throw it out to the dogs.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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