Editor in Chief: Moh. Reza Huwaida Thursday, January 18th, 2018

Will the Current Economic System Fall?

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Will the Current Economic System Fall?

As the euro tsunami hits countries one by one and there is no rock-solid solution on the prospective to control it, as well as the increasing financial crisis-led social annoyance across the glob, there are people talking about the collapse of financial system and perhaps even capitalism. However the fall of capitalism is not a new notion. It becomes decades and even centuries that economic and political experts found lassies-fair and market economy doomed, taken from Marx to Mao, to Lenin and etc. but yet it does not only fall apart but has become the only irreplaceable economy system across the world.

Though there are some politicians always criticizing the so-called cruelty of capitalism and market economy but yet they have no economic plan to put on the table and challenge the ruling economic system. With the current challenging problems, I do maintain that capitalism and market economy would not fall apart and would remain as an irreplaceable system in the prospective with only technical fixation.
Let's deal with two issues that have made many to find capitalism and market economy doomed.

The first is one euro crisis. Assessing euro crisis and severe differences among European leaders to deal with the issue jointly has caused many to talk about the euro collapse and necessarily a fundamental change in market system. it should be noticed that 17 European euro members, first of all, would not let the euro collapse because it will prove tragic not only for marginal euro countries but also for strong economies in the region like that of France and Germany. Moreover, even if the euro falls apart, it has nothing to do with economic system. Why?
But let's first answer the question about crisis in euro and its linkage with economic system.

Noteworthy to say, the crisis in euro zone is, in effect, caused by different factors. Right after 2008 financial crisis and following economic recession grasped countries around the world tightly, European banks and other financial institutions resorted to a kind of safe investment—purchasing sovereign bonds issued by economically weak euro countries. On one hand, the economic slump caused by 2008 financial crisis hit many European countries hard. As result, the revenue of these countries decreased terribly in comparison to pre-2008 level, but what remained constant was expenditure.

In spite of tough rules for the member to maintain budget deficits low and tight financial regulation, but many countries during good years provided fooling information to the monetary union and never deemed deficits as secret potential danger.

In another word, these countries have never thought of a potential global danger pushing them into a level that strengthens the concept of default.
Therefore, right after 2008 economic recession, the budget deficits in these countries started getting larger and larger. The process was further accelerated as national governments were forced to bailout companies and financial institution or simply pump cash into market to prevent the steep down move of general demand.

There the vicious cycle was repeated—pumping money into market, larger budget deficits, issuing more bonds to fill the gap.
So, as already these countries were wrangling with financial problem and facing budget deficits, the process was further accelerated. As result, deficits accumulated the sovereign debt into a level that changed the market concept of the so-called "safety of issued bonds". The budget deficits get larger and larger and crossed the conventional level, which cause no threat.

The sovereign debt of some these countries have become more 100 percent of GDP. But of course the story is not similar to all. Many views Greece as type of the country during years borrowed without considering the consequences. But there are countries wrangling with the financial crisis and unable to get out of it without help of strong euro economies like Spain.

Unlike, the budget deficit of Spain was not all big and it was lower then lower in comparison to Germany. As well, the sovereign debt of the country was not big enough to annoy the market for possible default. What brought about a larger budget deficit and its consequent accumulating sovereign debt was housing bubbles burst up in Spain like that of US which sent the country into quagmire of financial crisis.

But even in such circumstance, I think, though euro could avoid the current lethal consequence of the crisis. Unfortunately, they did not hold necessary steps to curb the crisis. Instead they resorted to measures which not only solved the problem, but further fuelled market panic.

Unlike US, each country euro countries cannot print money to pay their debt. Here only euro central Bank can print euro in the case required. But that is a long and complicated process, which cannot be held in urgent times. The option ahead of these countries was strong euro economies and international financial institution like IMF. But these masters did not provide them the required funds. They have had their own conditions.

When the concept was highlighted and market came into an understanding that it cannot deal with all euro countries similarly. And being a member to euro cannot actually ensure its money. Being a member to euro actually is not compulsory of the rest to bail out crisis countries.

This concept cost marginal countries too much. And market started reacting severely to the new concept. Suddenly, the borrowing cost for Greece, Spain, Portugal and etc hit the height and they could not provide their required fund from the foreign and domestic markets in previous level.

The problem multiplied. Governments resorted to austerity measures which further intensified the recession, as the result decreased revenues. The borrowing cost doubled, as result further budget deficits.
But with all these problems, there were no choices ahead.

In previous part of this article released recently, I talked about how the alarm dealt by euro crisis and increasing anti-financial institution protests like that of "occupy Wall Street Movement" have led into concept of possible collapse of capitalism. In this part, I am going to talk again about the euro crisis and try to distinguish between euro crisis and the fall of capitalism or the end of market economy.

It has not been so long that the concept of an ironclad monetary and financial euro union has been distorted, and market reacts now differently against different countries with the euro currency. The conceptual distortion has already dealt terrible blows to the region. Many financial institutions during years deemed all euro countries as a united region which deals with any possible financial crisis jointly. Thus, without care about the possible default by economically weak or peripheral euro countries started buying issued sovereign bonds and provided loans with much low interest rate.

The process was further accelerated after housing bubble-burst-up in the US. Banks and other financial institutions after US mortgage investment went bust and sought refuge in bonds issued by some euro countries.

But the crises in Spain, Portugal, Greece, Ireland and now Italy show that market has started acting differently. Now it costs, for instance, Greece multiple of what German pay for the same amount of loan. There is no loan available for Greece to receive and pay its huge debt, and no financial institution is ready to buy Greece bonds in order to provide with the capacity to avoid default.

Moreover, after tough economic and political bargain, euro economies approved to provide crises countries with economic packages on condition that they tighten economic belt and scale down largely their budget deficits. Some austerity measures have already enforced in several countries and there are further steps to be held.

The austerity measures have led into social and political disturbances. Various demonstrations have been held against government policies of reducing public budgets and raising taxes which further have led into higher unemployment rate.

George Papandreou, Greek Prime Minister, resigned after facing severe pressures from his euro counterparts over his statement to hold a referendum for being in the euro zone as well as tough domestic criticism over his austerity measures.

Meanwhile there are huge differences among euro leaders on how to deal with crisis.

Assessing the euro crisis and severe differences among European leaders to deal with the issue jointly has caused many to talk about the euro collapse and a sign of market economy collapse. it should be noticed that 17 European euro members, first of all, would not let the euro collapse because it will prove tragic not only for marginal euro countries but also for strong economies in the region like that of France and Germany. Moreover, even if the euro falls apart, it has nothing to do with economic system. Why?

But let's first answer the question about crisis in euro and its linkage with economic system.

Noteworthy to say, the crisis in euro zone is, in effect, caused by different factors. Right after 2008 financial crisis and following economic recession that grasped countries around the world tightly, European banks and other financial institutions resorted to a kind of safe investment—purchasing sovereign bonds issued by economically weak euro countries. On one hand, the economic slump caused by 2008 financial crisis hit many European countries hard. As a result, the revenue of these countries decreased terribly in comparison to pre-2008 level, but what remained constant was expenditure.

In spite of tough rules for the member to maintain budget deficits low and tight financial regulation, but many countries during good years provided fooling information to the monetary union and never deemed deficits as secret potential danger. In another word, these countries have never thought of a potential global danger pushing them into a level that strengthens the concept of default.
Therefore, right after 2008 economic recession, the budget deficits in these countries started getting larger and larger.

The process was further accelerated as national governments were forced to bailout companies and financial institution or simply pump cash into market to prevent the steep down move of general demand.

There the vicious cycle was repeated—pumping money into market, larger budget deficits, issuing more bonds to fill the gap. So, as already these countries were wrangling with financial problem and facing budget deficits, the process was further accelerated. As a result, deficits accumulated the sovereign debt into a level that changed the market concept of the so-called "safety of issued bonds". The budget deficits got larger and larger and crossed the conventional level, which cause no threat.

The sovereign debts of some of these countries have become more than 100 percent of GDP. But of course the story is not similar to all. Many view Greece as type of the country during years borrowed without considering the consequences. But there are countries wrangling with the financial crisis and unable to get out of it without the help of strong euro economies like Spain.

Unlike, the budget deficit of Spain was not all big and it was lower in comparison to Germany. As well as, the sovereign debt of the country was not big enough to annoy the market for possible default. What brought about a larger budget deficit and its consequent accumulating sovereign debt was housing bubbles burst up in Spain like that of US which sent the country into quagmire of financial crisis.

But even in such circumstance, I think, though euro could avoid the current lethal consequence of the crisis. Unfortunately, they did not hold necessary steps to curb the crisis. Instead they resorted to measures which not only solved the problem, but further fuelled market panic.

Unlike US, each country among euro countries cannot print money to pay their debt. Here only euro central Bank can print euro in the case required. But that is a long and complicated process, which cannot be held in urgent times.

The option ahead of these countries was strong euro economies and international financial institution like IMF. But these masters did not provide them the required funds. They have had their own conditions. So, these are challenges ahead of euro crisis which all look would hit the solid rock of political and economic impasse. But do these deadlocks mean putting an end to market economy? Giving a positive answer is too hard. Because there is no alternative on hand that can bypass these challenges.
To be continued…

Jawad Rahmani is the permanent writer of the Daily Outlook Afghanistan. He can be reached at jawad_rahmani2001@yahoo.com

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