THE EURO CRISIS

 

The news flows flowing out of Europe continue to worry. Everyone seems to fear the worst in Europe. The crisis seems to be spreading across Nations with little signs of any solution in sight. Just what is this crisis about ?

When 27 countries joined to form the European Union and 17 of them chose to make the EURO their common currency, they did not see the need to set up a common treasury. The countries did not adhere to any discipline in their overall borrowings. So we had countries in the PIIGS borrowing too much. Portugal , Ireland , Italy, Greece , and Spain have landed themselves in a debt crisis. These countries are unable to repay their loans and have run out of money to even trade with other countries.

In America , when there was a financial crisis , the federal reserve was ready to respond. The treasury was in place to take tough decisions . The pity is that there is no common treasury for the EU. Therefore , the response to the crisis is weak . Governments have been dealing with the problem individually and in half-measures. This has ensured that the countries have not done anything significant to solve the problem. The lack of an adequate collective response has hurt the global confidence in the EURO. The world is worried about the lack of a cohesive combined approach to the problem faced by the PIIGS and EU. Confidence in the EURO is shaken and very visibly so.

The EU neither has a plan to create a common treasury and fix the problems comprehensively nor does it have a strategy in place to respond to any extreme event . There are many possible extreme events – One or more nations defaulting again; One or more nations leaving the EU itself; one or more nations leaving the EURO.

The countries in the EU need to agree to many things now. Firstly, they must agree to spend less than they earn. They must not borrow to spend. If they do, it must be with the concurrence of a central European authority . Second, they must begin the process of setting up a common treasury that will decide policy and arbiter among nations. Third , Individual countries must go through pain before they are able to return to the growth path again. The political leadership of the countries must allow hard economic decisions to be taken and implemented. This could create social unrest in affected nations. Fourth , countries must be ready to help one another and stick to the terms between them on which the help is rendered. Fifth, the Nations in the EU should collectively approach the problems faced by institutions and help each other avoid failure of these institutions.

Europe is now not clear about how they should move ahead and who should take the lead. After all, this is a onerous responsibility for a problem which has painful solutions. The bitter pills are ready to be swallowed. But, is anyone ready ?

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