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Scrutiny
 
EUROZONE: THE ONGOING CRISIS
The Devil, Deep Sea & The Debt
Troubled EU Economies have to Hastily rid themselves of their debt; but why hasn’t The EU fined Eurozone Members for their Financial Profligacy?
Issue Date - 21/07/2011
 
The great recession of this century exposed a fundamental truth of economics; huge imbalances in real economy and/or trade can never be covered up for long. In fact, the longer they are covered up, the harder they get back at you.

After nearly 18 months of struggle, major blocs of the world have been able to emerge from the effects of the crisis, but the situation with the 17-member strong Eurozone remains questionable, especially with Greece, Ireland, Portugal & Spain so perilously poised. Economists have stated that Greece’s mountain of debt of €325 billion is almost twice the sustainable level and the situation is graver than the 2001 Argentina crisis.

As per the Stability and Growth Pact in Eurozone, any member state exceeding the annual deficit limit of 3% of GDP will be fined. In 2005, Portugal, Germany and France crossed the limit, but no steps were taken. Most interestingly, 14 out of 17 members except Estonia, Luxemburg and Finland crossed the deficit limit in 2010 as per Eurostat. Ireland with a government deficit of 32.4% of GDP, Greece with 10.5%, Spain with 9.2%, Portugal with 9.1% and Slovakia with 7.9% are at the highest risk.

Though debt to GDP ratio of the Eurozone is less than US or UK, the bigger challenge is ensuring an effective political mechanism to tackle the crisis. Renegotiation of debt has to be taken to a logical conclusion through consensus. This is not currently the state in Greece, for instance, where Greek PM George Papandreou has been struggling to get new austerity measures accepted so that a fresh bailout package may be approved. Moreover, EU should adopt a balanced trade policy as in the current context; Germany enjoys an enormous trade benefit while Greece and Slovakia suffer with a small product base. Noted economist Nouriel Roubini warned that “failure of the Eurozone will be an ultimate breakup among the monetary union itself.” Can Europe prove him wrong?

 

Aamir Hossain           

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