Sunday, February 14, 2010

Sovereign Insolvency - Global Financial Crisis, Round II?

WSJ: The Greek Tragedy that Changed Europe
Financial Times: EU Stops Short of Immediate Aid for Greece
The Economist: The Spectre that Haunts Europe

The financial woes of Greece reported a few weeks ago in Greece’s Financial Troubles were only the beginning of a much bigger problem for the euro. Despite the vehement opposition to a Greece bailout a few weeks ago, European governments are now reconsidering as the European currency continues to fall. Finance ministers from EU nations met last week to discuss a possible Greece bailout that isn't exclusively altruistic. In addition to helping prevent Greece from defaulting on its debts, EU members are looking for a way to reassure the rest of the world that investment in other euro-zone countries remains sound. The meeting fell short of complete and immediate aid to Greece, with the 27 members of the EU pledging to take a coordinated and determined action “if needed to safeguard [monetary and economic] stability.”

While this economic crisis has caused some to call for coordinated EU action to prevent further currency deterioration and a possible European divide, German Chancellor Angela Merkel is insistent that if Germany or any other EU member is going to bail out Greece, Greece must make additional efforts to stabilize its monetary situation by cutting more spending and increasing its value-added tax, among other things. Others echo Merkel’s concerns, calling for Greece austerity before coming to the rescue.

Others are more leery of a European bailout, noting that this kind of a crisis should have been anticipated when EU members agreed to a common currency because of the complications in maintaining a separate governments while sharing a common currency. (Britain held on to its currency, the pound, for this very reason). Because of the interrelatedness of the euro-based economies, uncontrolled spending by one country in the currency union can greatly affect other union members. This was the case in 2003 when France increased spending to curtail an economic recession, an act that prompted outcries from other euro members like Portugal and Italy that had cut budgets to qualify for euro membership. Some members have even called for Greece’s ejection from euro membership for lying and tricking the EU through false financial reporting, but euro treaties do not provide for this kind of penalty.

The EU Stability and Growth Pact, a pact signed by all EU members that is notoriously inflexible yet sometimes unenforceable against larger EU members, explicitly prohibits any EU member bailout. Despite the fact that the IMF has experience in pulling troubled nations back from the brink of collapse, Greece and other EU members are resistant to an IMF bailout for political reasons, including the stigma that comes with it, the fact that many view the IMF as an “American-influenced institution,” and the international burden-shifting that would result.

Discussion Question:
1. Will stricter economic and monetary policies cause other European counties to adopt the euro (to become a “United States of Europe”), or will they prompt non-EU countries to continue to hold onto their monetary independence like Britain?

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