The relief in the markets is visible after the decisions of the Euro Summit. Is this a solution to the crisis? Of course, there are encouraging signs. Therefore, the planned recapitalization of the banks is desirable, but needs to be expanded (even – and especially so government bonds require capital requirements). The debt restructuring in Greece was required in this place long ago. The country really needed a depreciation in order to become competitive. Nevertheless, this path was blocked. In addition, renewed appeals to Spain and Italy (with the uncertain commitment of the local prime minister) to reforms are purposeful. The only question is how credible this kind of announcements are .
Less encouraging are the attempts of leverage
Neither the insurance solution nor the idea to include Chinese capital against possible aggressive demands of the Chinese government, are very promising. The sovereign debt crisis-stricken financial intermediaries be licking your fingers after about 20 per cent backed GIIPS bonds. There is also the risk that the trillion-dollar bailout of the reform pressure is reduced and this goes for all shaky candidates. The increase of the bailout levers again discipline role of markets. The debt crisis is only solved when the co-liability is terminated. As long as the taxpayers are liable for Greek, Portuguese, Italian, and eventually also for French and German problems, there will be no solution.
The next summit is sure to come
Then governments can fight for the causes and come up with credible sanctions review rules on debt and limitation of liability. Actually, it is not a model, which you can present the financial economy and the monetary system. In this respect, the adoption of a compulsory existing inflation is due to a lack of alternatives rather simple extrapolation of microeconomic market theory. There are scientific approaches that prove exactly this extrapolation as inadmissible. One is tempted to believe that academic economists were experts in economics. They are not. They are only experts in their own models. These, however, have repeatedly been shown to be false. The world economy is a chaotic system; the approach to the science is still trying to senior mathematics. The discrepancy between theory and reality is for every external observer is now clearly visible, but is ignored by the academic world completely.
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Restless Europe’s leaders constantly looking for solutions. However, the expiration date of the euphorically proclaimed solutions is becoming shorter and shorter. Two weeks ago, because it was decided to increase the financial capacity of the EFSF to using a lever to two trillion euros. The policy celebrated itself on the stock markets there was a price firework.
Now, the policy is no longer in a party mood and the rally in the stock markets has proven to be temporary success. Still, the policy is not ready to think about the previous “solution strategy” to basic. It adheres to the way to try to solve the over-indebtedness of states by more money that is new. In the search for new sources of money, the political focus is now clearly on the so-called Special Drawing Rights.
These are financial claims of the several States to the International Monetary Fund. Together with the treasure and the foreign exchange reserves, they form the financial reserves of the Bundesbank. Once the special drawing rights called into question, then the Going for Gold of the Federal Reserve is expected to soon be no longer taboo. Nevertheless, this would be nothing more than the beginning of a state financing from the central bank, because of rising inflation. It is time for politicians to take stock.
Trying using loans to buy time, they actually did not receive that to which they aspired. The supply of fresh capital has so far led only to the fact that the pressure on the necessary structural reforms in Greece has lost touch.
At the sametime, Greece is in a vicious circle. The austerity are for measures. The negative impact on the economy is that tax revenues are collapsing while there is increasing the debt. Nevertheless, it seems likely to continue along this difficult path. The Greek economy needs to shrink because they are not in an economic crisis there but rather in a structural. Greece should be saved with future growth and it will be compromised as little as possible. This will affect on government spending pensions and various social benefits.
The economy-encrusted structures are broken now. Only more competition creates more long-term growth. In addition, wages must fall, but in the same time, the Greek tourism industry becomes more competitive. Finally, the administration also must be modernized. Without a doubt, this is a major challenge for the Hellenes. Greece should return path of growth but this time there where this return is not built on sand.
The previous fight against debt and structural crisis in the European Economic and Monetary Union (EMU) makes clear, what is lacking in Europe, namely a lack of strategy. The solution is obvious. The euro zone needs a get-out clause. This would be enough, both the debt crisis and the structural crisis in the euro zone to solve the long term. The apparent insolubility of the euro area seems politically desirable, as the “irreversibility” of EMU membership and it looks economically highly questionable. It acting as an implicit guarantee.
The result is a moral hazard behaviour on the part of the markets and the EMU member states. Thus, a small economy like Greece, ensure extraordinary turmoil. Of course, an exit clause, after a “failure” of the EMU membership would be regulated by law, would have a preventive effect against economic and political turmoil, as well an effect on strengthen the functioning of the euro area. First Financial markets were a possible exit.
Long-term financial markets would play their disciplining function for national fiscal policies again. In addition, the state would reduce demand for debt. The reason is simple: the long-term costs of fiscal misconduct would be placed in the open political competition and accordingly returns the fiscal discipline. An exit clause in the short term would reduce the uncertainty in financial markets and thus facilitate political and economic adjustment processes.
From the perspective of financial markets is a high degree of uncertainty about the distribution of the resulting adjustment costs on the EMU member states in the debt crisis. It comes to the current legal and institutional conditions for the euro area. The bargaining position of the other EMU member states in the debt crisis would be strengthened. Without an exit clause of sanctions, as a rule, there is no truly effective ways to enforce fiscal policy and structural reforms in individual EMU member countries.
An exit clause in the euro area impose today’s adjustment costs for the lack fiscal discipline in earlier periods.
Paradoxically, an explicit opt-out clause for the euro area would mean that the probability of a disintegration of the euro area is not increases. The cohesion, convergence, and the functioning of the euro area would be strengthened by an exit clause.
Whether this will succeed, it not a matter of economy, it is a matter of French-German negotiation skills in crisis management.