Some optimists argue that this year should see grass shoots and that the world economy is steady on course towards recovery, following the global financial crisis, but volatility remains because of lingering uncertainty. Since the global financial crisis erupted late in 2007, the world economy has also been plagued by Eastern Europe`s economic woes, the Dubai shock, U.S. financial reform and lower growth in China. In the age of the global economy, a crisis in a vulnerable or financially squeezed economy immediately spreads to the entire world. It is not surprising to read that the economic malaise that gripped America climaxing in September 2008 when we witnessed the downfall of Lehman Brothers will leave the Eurozone unscathed. Politicians on our side of the Atlantic kept reminding us of the protection that euro has bestowed to its members while outsiders such as Iceland and Britain has suffered the worst economic drops in their history since the Great depression. . Financial trouble surrounding certain European countries has sent global markets into a state of shock. Major stock indexes worldwide have plummeted due to fears that Greece, Spain, Ireland and Portugal (ovingly termed PIIGS) could go insolvent due to their fiscal deficits. This also sent the euro currency down against the dollar.
Greece is the epicenter of Europe `s insolvency crisis due to its inefficient public sector, deep-rooted corruption, excessive social security spending, and reduced tax revenue. True to the mark one sees how Athens has responded by announcing austerity plans to cut its fiscal deficit, but the declaration by Greek unions to go on a general strike has worsened Athens` finances. At 12.7 per cent of gross domestic product (GDP) it is more than four times the EU’s agreed limit under its Stability and Growth Pact .Since the formation of the euro, Greece has been borrowing excessively buoyed by lower interest rates on the market assumption that they were effectively backed up by richer core eurozone states such as Germany. But German workers do not have deep pockets right now and are reluctant to spare hard won cash out of their recent efforts to revive their exports. A recent poll published in Bild am Sonntag newspaper showed that 53 per cent of Germans said the European Union should, if necessary, expel Greece from the euro zone. More than two thirds of Germans polled did not want Germany or any other EU country providing credit to Greece if it can’t raise enough debt to fund its deficit. It’s not going to be easy for the German government to explain to its electorate why billions of euros of German money should go to help the profligate Greeks. The sentiment here is that Greeks lived beyond their means for too long, and been so careless in their disclosure of national accounts. Still logic dictates otherwise, in fact some economists thinks Germany will back down on its hard-line position if a Greek debt default appears inevitable. That’s because a default could trigger a second international banking crisis. If the Greek crisis spreads to PIIGS countries fears will continue to haunt international financial markets. It is easy to pontificate that Europe should bail them out; prima facie this works out as the easiest solution in the short-run. But it can act as a dangerous precedent when we see how smaller Baltic countries also foundered and did not claim any bail outs? Again bailing out Greece or Portugal is one thing but Spain with a larger share of the Euro zone economy can be more onerous. Spain is reckoned to absorb 14 per cent of the entire euro zone. When in trouble it does not rain it pours so we read how Portugal’s position looked even weaker after opposition parties defeated a government plan for austerity measures that the country needed to pass to soothe markets and reduce their soaring cost of insuring its debt. As the year unfolds it is certain that steady nerves will be needed in 2010. Is this the start of the breakup of the monetary union?
There is so much at stake here. But one cannot see the PIIGS devalue their currency as has happened in Argentina in 2001. In the case of Argentina, which received two massive IMF loans in 2000 and 2001 ultimately only delayed the inevitable harsh adjustment and made the country’s ultimate currency default even more traumatic.
This is a lesson that the PIIGS cannot afford not to heed .It is true that the customary way out of a debt crisis is to devalue one’s currency. For all PIIGS to devalue simultaneously, they would have to pull out of the Euro, pass a law that sovereign debts are payable in a new local currency and then devalue. Collectively with such an action PIIGS threaten to bring down the edifice unless other rich countries come out to bail them out. Their chronic ills are deep rooted and a common factor is outlandish unemployment with the attendant labour discontent. All PIIGS need to undergo surgery and not just splash happily at the gym to cut their accumulated fat hoping that by tinkering their budget with minor cuts it could heal the patient. Such austerity programs are typically very difficult to get done in democracies. This poison chalice results in an accumulation of economic sickness which does not just vanish but untreated its contagion will be spread within the finances of the rest of the Euro zone.
Within the healthy EU states nobody is in the mood to tighten their belts to take on the additional debt of the PIIGS. Typically one cannot expect long suffering Spanish workers out of a deep sense of solidarity carry out their public financial obligations to assist in bailing out others while their house is on fire. As we have witnessed in Malta now saddled with a national debt marking 70 per cent of GDP spending last year exceeded budget expectation. So for us the realization is quickly falling into place that it’s impossible to work off debt over any reasonable period. Unlike Ireland and Greece we rationalized that the cancer is not deep enough so we need not take the plunge and freeze pay or cut off politician salaries as done in PIIGS. So far our leaders consider that palliatives will see us in repaying our debt over a longer period .With a one seat majority there is a limit how much the government can displease the voters with deep austerity cuts so we live by the day and wait and see when the tide turns in our favour. Just imagine the chaos stirred by unions if the budget projected a small say five per cent cut in salaries which will be gradually incremented to fifteen per cent unless productivity improves.
There will be mass strikes akin to ones organized in protest against the introduction of vat in 1995, when all unions including GRTU took to the streets and paralysed the country for 24 hours. The same disgruntlement is being felt by workers in the four countries collectively termed the PIIGS. Regrettably their sickness is so acute that it has turned into gangrene in some cases. Just see the deep unemployment situation of Spain with one in five jobless and no hope of an early turnaround in the economy. The same can be said for Ireland which only four years ago was envied as the Celtic tiger with stellar growth and now it is mired in a deep recession with three of its main banks nationalized. Yet what can be done to help out such members apart from recourse to the IMF lending? Malta has recently agreed to lend its share to this fund and contributed euro 120 million. There was some criticism about such generosity when as a small state we are bridled with such a wearisome debt level however the finance minister commented that if Malta does not pay its share then there will be trouble when itself will be in need of any assistance. To conclude one can see troubled waters ahead for this year and the euro will face its first real baptism of fire. Naturally there will always be Jeremiahs who will fault the euro model and its success can be measured by the speed that it regroups its forces amidst such turbulence. The show of solidarity amongst members when faced with a common problem is the real test of the monetary union. One augurs that the International Monetary Fund ventures in to rescue Greece to prevent a default. Only by feeding the PIIGS can the euro family show true solidarity with its weakest siblings.
The writer is a partner in PKF, an audit and business advisory firm [email protected]
