Can The Euro Be A Convenient Currency?
Anupam Bapat, reporting from the United Nations Economic Commission for Europe (UNECE), sheds light on how the adoption of the Euro by the remaining 9 nations of the European Union (EU) changes their scenario.
Being independent is one of the key things everyone tries to do in their lives. Many different countries have tried to show their courage by becoming an independent nation and writing their own success story. Different young minds have done the job of being independent and many upcoming generations are mentally equipped and mastered to be one.
But now, the situation in the European Union (EU) is such that countries are not single individuals who are alone in this world, stressed because of their employability or personal inconveniences. They are a nation, trying to survive and rise among other upcoming and rising nations. Being a part of an uprising of one of the greatest political and economic unions of Europe, they have to consider other possibilities and suggestions.
Countries like Denmark should consider shifting to Euro as their currency because there is an authority which looks forward to the decrement of the inflation of the currency; something that all the Euro currency countries want. Shifting would also help them recover from their ongoing debt and thus help in their relations with the neighboring countries.
The failure of the Euro in 1998, due to a lack of implementation back then might be a case to study. Different strategies were made to compensate the debts countries fell into and many made it through the hard times. Countries like Italy, that were in a huge debt, made it through the difficult times with the help of the neighboring states. The European Central Bank (ECB) helped the countries with ideas and references. There are many different opinions regarding the failure of Euro as a currency but things have changed now and the economies are surely rising the new heights. Considering a modified situation regarding the changes in the currency on the countries who have shifted towards the Euro, they all can now interact and come towards a common ground to work and thus helping them as a whole.
The main motive to have Euro as a common currency is to become a part of the family; to share the positives and the negatives and be the part of the changing world together. Difference in cultures, economies, commodities and history might cause political disruption but being a part of the EU can help them individually grow and increase with social bonding.
(Edited by Harsha Sista)
The Blunders Behind Vaulted Doors
Nivedan Vishwanath, reporting from the United Nations Economic Commission for Europe (UNECE), investigates the lesser known culprit for the European debt crisis.
The European debt crisis, as we know it, came into existence in the aftermath of the Great Recession with Greek debts peaking at around 113% of the country’s Gross Domestic Product (GDP). A quick glance over the causes indicated inflexibilities in the monetary policies, a growth in macro-economic imbalances and other structural problems within the Eurozone. The International Press (IP) reporter, however, feels that a closer look indicates involvement of another entity, one which played a very important role in the crisis and emerged out as a benefactor in the end — investment banks.
Investment banks directed several events that ultimately led to the debt crisis. It all started out with rampant lending drives by these banks to overseas borrowers as well as borrowers within the Eurozone, the prominent borrowers being the governments of Portugal, Greece and Spain. Lending to countries within the Eurozone was facilitated by the single currency as it eliminated the problem of devaluation of local economies. The assets involved in the transfer were mainly real-estate and consumer-credit. In 2001, Greece decided to enter the Eurozone. In order to do that, it had to abide by the Maastricht criteria. The criteria required all the Eurozone member states to be stable in the areas of inflation, levels of public debt, interest rates and exchange rates [1]. However, Greece was heading in the wrong direction. It was not able to meet several of the joining criteria and the only way in was to reduce or hide its debt. When Greece was looking for ways to hide its economic debt, Goldman Sachs came up with a discreet channel to lend a loan of € 2.8 billion using a transaction channel dubbed as “The cross-currency swap” which was legal and helped Greece hide 2% of its national debt. But in the wake of 9/11, bond yields hit an all-time low and by 2005, Greece was left with € 5.1 billion in loan repayment. This fiasco generated a profit of € 0.6 billion for Goldman Sachs [2]. These asset flow systems were hit during the mortgage crisis during 2007-2008, which was followed by the international recession in 2008. This series of events caused a majority of the private banks to bail out. Greece was worst hit by the crisis. While private investment banks profited over these discreet transactions, Greece piled up debt. When it finally announced its national debt, it had increased to around € 400 Billion.
Tracing back in history, adoption of the Euro by Greece in 2001 was among the most important events in Eurozone’s history and Goldman Sachs’ involvement in trying to hide Greece’s debts was the starting point of a series of events that ultimately led to the crisis. With Greece adopting the Euro, it had access to easy loans which it took recklessly and was unable to repay. The press reporter feels that the pursuit of these investment banks to seek profit initiated a chain of events whose repercussions had to be faced by the entire zone. When the banks bailed out in 2010, Greece was not offered debt relief. Instead, they were given fresh loans to pay-off their old loans. In all essence, the banks walked off with minimal losses and left everybody else to suffer. With the banks (and not Greece) bailing out, the politicians smartly transferred any future losses from Greece to the European public. The investment firms clearly knew what they were doing and played their cards well. They evaluated the risks and the cost of any deal better than the country accepting it.
Sources:
1. https://www.ecb.europa.eu/explainers/tell-me-more/html/25_years_maastricht.en.html
2. ECB Watch
(Edited by Harsha Sista)
Investment banks directed several events that ultimately led to the debt crisis. It all started out with rampant lending drives by these banks to overseas borrowers as well as borrowers within the Eurozone, the prominent borrowers being the governments of Portugal, Greece and Spain. Lending to countries within the Eurozone was facilitated by the single currency as it eliminated the problem of devaluation of local economies. The assets involved in the transfer were mainly real-estate and consumer-credit. In 2001, Greece decided to enter the Eurozone. In order to do that, it had to abide by the Maastricht criteria. The criteria required all the Eurozone member states to be stable in the areas of inflation, levels of public debt, interest rates and exchange rates [1]. However, Greece was heading in the wrong direction. It was not able to meet several of the joining criteria and the only way in was to reduce or hide its debt. When Greece was looking for ways to hide its economic debt, Goldman Sachs came up with a discreet channel to lend a loan of € 2.8 billion using a transaction channel dubbed as “The cross-currency swap” which was legal and helped Greece hide 2% of its national debt. But in the wake of 9/11, bond yields hit an all-time low and by 2005, Greece was left with € 5.1 billion in loan repayment. This fiasco generated a profit of € 0.6 billion for Goldman Sachs [2]. These asset flow systems were hit during the mortgage crisis during 2007-2008, which was followed by the international recession in 2008. This series of events caused a majority of the private banks to bail out. Greece was worst hit by the crisis. While private investment banks profited over these discreet transactions, Greece piled up debt. When it finally announced its national debt, it had increased to around € 400 Billion.
Tracing back in history, adoption of the Euro by Greece in 2001 was among the most important events in Eurozone’s history and Goldman Sachs’ involvement in trying to hide Greece’s debts was the starting point of a series of events that ultimately led to the crisis. With Greece adopting the Euro, it had access to easy loans which it took recklessly and was unable to repay. The press reporter feels that the pursuit of these investment banks to seek profit initiated a chain of events whose repercussions had to be faced by the entire zone. When the banks bailed out in 2010, Greece was not offered debt relief. Instead, they were given fresh loans to pay-off their old loans. In all essence, the banks walked off with minimal losses and left everybody else to suffer. With the banks (and not Greece) bailing out, the politicians smartly transferred any future losses from Greece to the European public. The investment firms clearly knew what they were doing and played their cards well. They evaluated the risks and the cost of any deal better than the country accepting it.
Sources:
1. https://www.ecb.europa.eu/explainers/tell-me-more/html/25_years_maastricht.en.html
2. ECB Watch
(Edited by Harsha Sista)
Let it Go
Nivedan Vishwanath, reporting from the United Nations Economic Commission for Europe (UNECE), sheds light on the Grexit issue.
The Hellenic Republic’s (Greece) protectionist stance, combined with low employment, rampant tax evasions and dubious transactions with investment banks pushed the country into crisis. Lavish liberal policies (which include pension plans and civil servant salaries) eventually led to the country taking massive loans. After their entry into the Eurozone, these loans were provided at very low interest rates. The government’s fiscal profligacy, along with the mortgage crisis initiated the Greek economic crisis. With inter-bank exchange rates shooting up, the trust in Greek banks diminished. By 2010, banks in Greece has defaulted. A lot of remedial measures were implemented—austerity measures, financial packages by the Troika, etc., but nothing worked out. It is now high time to realise that enforcement of austerity measures during the recession would only deteriorate matters further. A default scenario is fast approaching for Greece. If this happens, it would not only default on the loans taken between 2000 and 2010 but would also default on the post-bailout funds lent by the Troika. Greece is now at the crossroads; it either leaves the European Union (EU) or sticks with it.
Any decision that the country takes at this point of time will be instrumental in shaping the future of the European economy. The International Press (IP) reporter believes that the situation that Greece is in can be correlated to the situation of an individual having an infection—the sooner the infectious part is cut off, the faster is the recovery. Should the individual choose to live with the infection, it might soon spread to other parts of the body and cause more harm. In the press reporter’s opinion, Grexit might have immediate consequences, but it could prove to be beneficial for both Greece and the EU in the future. The present austerity measures have stripped Greece of its sovereignty. A Grexit ensures that Greece regains its sovereignty. In the present situation, Greece exercises little control over its economic policies and is easily influenced by institutional tensions across Europe. If Greece exits the EU, it will finally have full control over its economic policies. It may have to adopt a new currency, (a new drachma maybe?) which might be devalued. But this devaluation provides a fresh starting point for Greece. Devaluation would make Greek people poorer, but this also enables cheaper exports which would help build the economy.
Not only Greece, but the EU would also be presented with an opportunity to start afresh, as it can now have compatible labour laws, fiscal deficits and a chance to revamp the management systems that take care of the entire economy. If Greece chooses to stay in the EU and defaults, it would affect the entire European economy. With debt mounting in south European countries, a Greek default would possibly lead to several other member states defaulting. This would shatter the European economy beyond repair. If Greece exits the EU, it could also get away with a substantial amount of debt. If negotiations are made to write off a certain percentage of Greek debt, then the European Central Bank (ECB) would able to protect the devaluation of the new currency that Greece would adopt. Also, with the new currency, Greece would regain the benefits of floating currency exchange rates similar to the benefits that it had before its adoption of the Euro. One minor speculation that exists is with regards to hyperinflation. If Greece starts printing currency notes in large excess, the inflation rate would shoot up. While problems like this could be considered as minor, one must ensure that the situation should not escalate beyond control.
Greece has a crucial decision to make, and irrespective of whatever decision is taken, it would be anything but easy. A Grexit would initially be tough on everyone, but it would ensure that the situation becomes better in the longer run.
(Edited by Harsha Sista)