Editor in Chief: Moh. Reza Huwaida Friday, March 29th, 2024

The Euro Crisis and Sustainability of the System

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The Euro Crisis and Sustainability of the System

Right after 2008 financial crisis, all countries have been engaged in severe battle to control the fallout and restrict its consequential effects. While part succeeded but many are still writhing in sludge and have no idea how to stop. Generally speaking, countries supported two different approaches. One, which largely supported by European countries, was the so-called tightening economic belt and holding austerity measures; second, supported by US, based on the notion that austerity measures would dishearten the market and stoke a chain of regressive improvement. So, it was better to bailout companies and pump cash into market in order to pull it back on the track.

Without judging making any judgment about which one is right or wrong, one thing should be noticed. That is the problematic issue of sovereign debt. It was not deemed dangerous initially but has turned out back-breaking as many countries are facing the threat of systematic and unsystematic default. Though United States has the largest sovereign debt on its hand—around 15 trillion dollars——but now it is Europe which has become the oil-well of crisis that is generously providing the energy for crisis engine to smash as many countries as it can.

It does not look illogical if claimed that euro is the Lehman Brothers of the European Union. Being part of the euro has gone from one extreme to another——from insurance for having economic stability to cleaning the mess of the others.

Presently, strong economies in eurozon are under embattled condition to bailout Crisis-laden countries like that of Greece, Spain and a third biggest Euro economy, Italy. Countries like Spain, trying to acquire sympathy of financers like Germany and World Bank has employed huge austerity plan to be qualified for another round of bailout. But those measures have sparked civil disobedience and series of protest and demonstration which, in turn, indirectly impose loss on the already financially strained government budget.

Now the problem is not marginal euro countries, but great economies too are suffering terribly. In another word, the great concern for the world is not Spain, Greece, so and so but contagion of the crisis to much bigger countries. Months ago, Italy was hit by the storm and the Prime Minister forced to step down. Many countries, including Italy, have announced new wave of austerity measures to turn the confidence back to the market. But yet nothing looks ok.

Weeks ago, the credit of nine euro countries, including France one of the two great euro economies, was downgraded by S&P. the AAA+ rate for France fell into AA+, which of course increase the cost of borrowing of French government.

This challenge is largely due to increasing sovereign debt. The question is: what are the reasons behind accumulating sovereign debt euro members cannot get rid of it? It can be answered in shortly, i.e. during last many years Euro members have been indulged in excessive spending. In another word, they spent beyond their means, and lived a life they could not provide.

During decades, people in weak euro economies enjoyed a dignified level of economic prosperity. Now they are not ready to accept a lower level of economic condition. They react quickly against any plan or policies that emerge so as to weaken that convenient prospective. Now they are not willing to share the burden generally brought about by inappropriate activities of Wall Street and global financial institutions. They are fighting back and asking government for generation of jobs, which has now become the biggest dilemma of developed countries.

The battle against crisis has not succeeded yet. And it has fuelled deeper question about the economic system. Presently, there are deeper questions about the ruling economic system: whether is the system sustainable and working out with small technical fixation?

There are leftists gaggling now days more than ever while hearing voices calling for economic regulation and restraining the presently unbridled capitalism which has led to growing gap and creation of economic classes. Though economic classes have been always out there in the history with shadowy borderline, but the situation is getting severe and serious as the gap has become so wide that no the kind of political measure can bridge it.

So, there are needs of much bolder and fundamental steps to solve the challenge. What kind of measures must be held?
No doubt, 2008 financial crisis was not the only recession; however, it was the biggest. But all economic crisis and stagnation was ultimately ended by governments' interventions during past decades. But it is the first time, after the biggest economic crisis of 1930s, that governments' interventions have been unable to solve the problem and bring the confidence back to global markets entirely. Instead, this time a new scenario came to dominate the market. That was exactly when governments started injecting cash into the global markets to restore their confidence.

Before the eruption of the crisis and collapse of the global market, many countries around the world without considering the consequences were running on visible budget deficits and sovereign domestic as well as foreign debts.

With the eruption of recession, on one hand, the government revenue started moving down equally with the decline of markets. On other hand, many governments in order to bring the confidence back to market unwillingly started bailing out financial institutions and corps' runs. The measure set public budget on edge of precipice and pushed governments further into huge debts that many are unable to escape the possible defaults.

Thus, the prospective of an economic chaos is booming. And there are voices heard about a global cooperation and collaboration to deal with challenges jointly otherwise the global recession would wash away countries one by one. What politicians and financial institutions chief can do actually?

Though often there are statements for system change, but decision makers understand there is no alternative to replace. So, what they prescribe for the economic pain is technical fixation through serious sticking to global interests rather than national ones. And also bail out of crisis ridden with countries having cash.

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

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