Friday, July 15, 2011

PIIGS Secretly Wish to Ditch Euro

By Grant de Graf

Factors that provide a framework to a pragmatic solution to the European debt crisis.

Despite several plans to resolve the bond crisis that is sweeping Europe, a solution that deals with the fundamental causes, continues to escape policymakers. This is because key players are focused on embracing a diplomatic solution that will achieve consensus, without considering the long-term practical implications that will result from their proposals . For example, the additional funding that is being provided by the ECB for Greece's bailout, may allow the Greek treasury a brief spite of relief. However, it does nothing to set the country towards a path of growth and recovery. (See Greece: Trojans and Spartans Return to Battle) In fact the punitive austerity measures that are being imposed on PIIGS by the ECB, only serve to protract recession and make the recovery nothing more that a pipe-dream. (See Austerity vs. Stimulus: Who is Winning the Race)

Regions that are caught in the European Debt crisis on the other hand, fear financial isolation and the inability to raise capital independently, hence their outward expressions to remain loyal to the Euro and to perpetuate their membership of the Euro zone. Secretly, they carry the heavy shoulders of remorse for having even considered ditching their local currencies and converting to the Euro currency. It has invoked an era of high prices, lower standards of living, unemployment and high debt ratios.

On the other hand, core policymakers of the European Parliament interpret consent to release PIIGS from the Euro and to revert to their independent currencies, as a failure of the Euro. This is not the case.

Releasing PIIGS from the Euro is the only chance that Europe has of saving the currency and failure to provide these regions with that alternative, will be the final decree that terminates the existence of the Euro forever. Whereas agreement for troubled economies to revert to their independent currencies may be viewed as failure, it is not. It is a positive that will allow the stronger countries of Germany and France to prosper under the auspices of the Euro, while providing weaker countries an opportunity to recover. Such economic reconstruction will need to be accompanied through the privatization of public assets to reduce debt, lower taxes, in addition to government and foreign expenditure programs that can capitalize on those regions unique strengths, respectively.

Separately, there has been some discussion about the possibility of the ECB forgoing a portion of the debt that it holds over Greece. This is ludicrous. To ensure that its assets are protected, the ECB will need to provide PIIGS with credit and assistance that it requires for recovery. Interest on debt needs to be rolled over and capitalized - PIIGS has already suffered significant damage to its credibility and the fact that it cannot service debt, has been factored in by the market.

Funds need to be made available for capital expenditure programs in the regions that will impact real economic growth and not for appeasing creditors, who are looking for a payback on their investments and from economies that are inefficient and virtually bankrupt. Further, advancing funds to Greece to pay interest on its bonds serves investors, but does sweet nothing towards resolving that country's economic hiatus.

The key person who will need to orchestrate a solution is new IMF head, Ms. Christine Lagarde. She understands the importance of providing a blueprint that will be encompassing and that will not deal with issues in a piecemeal fashion, as has been the case in the past.

DSK would have said, in support of her efforts to seek a remedy. "I wish you lots of mazel."

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