Epitaph for the euro
"Not so easy," says Thomas from Insight Investment Management, "the recession in Europe is going to happen, and if the ECB does what it should and aggressively eases policy, there should be a weaker euro then year. However to start with, can anyone be complacent when contemplating the break-up of the euro experiment which allowed partners just as Greece to borrow till the cows came home in a bid to finance its profligacy."
Faced with unprecedented unemployment and deteriorating finances, Greece is being blamed by economists for having narrowed Europe's room for manoeuvre in battling the contagion, which threatens to pitch the country into default, shake its banking system, infect Spain and Italy and tip the world economy into recession.
Addressing journalists in Brussels, Dr Gonzi said that so far it does not appear that Maltese banks need an injection of fresh capital, adding that the country's banking system is considered very robust' with exemplary strong balance sheets. Not so lucky was Dexia: a Belgian bank which last year faced severe difficulties and had to be bailed out by its sovereign shareholders. Last month in Spain, the fourth largest bank, Bankia, needed a 19 billion capital injection by the State to stabilise its balance sheet. Does this volatility bode then for the stability of the euro in its medium term growth prospects? A wise answer was recently given by Mr Barroso in Brussels who said that "at the same time we swim, divided we sink".
He warns heads of government to toe the line. With courage and determination the troika is expected to reach agreement on boosting long-term growth. The recipe or cure for growth heralds enhancing measures, which include exploiting the single market, reducing the administrative burden and reducing the overall regulatory burden, among others.
Again what is good for the goose is as well good for the gander. Ironically, history shows us that when Germany and France exceeded official limits the goal posts were conveniently moved and they were not expected to pay fines or launch any austerity measures. So what is the best solution to salvage the euro and avoid the collapse of the banking dynasty in Europe? It is not an easy question to answer.
Some are against fiscal federalism, and came out rejecting the introduction of a common consolidating tax base and the imposition of pan-European financial transaction tax. However in the absence of a union of homogenous countries with compatible economic growth however faced with a deep recession, the solution surely lies in creating a huge EFSF mechanism that serves to cushion all potential bailouts and calm the markets.
As stated previously, at the recent summit leaders insisted that banks undergo substantial recapitalisation to cushion any toxic debts in their Balance Sheets. So apart from the leverage of EFSF, there is a cost of new capital to prop up banks and help them get rid of potential impaired Greek bonds. This is no walk in the park, especially with governments but urging financial institutions to write off losses of 50 per cent on their Greek debt.
And but markets are all in all sceptical, saying that such measures are purely cosmetic. The Greek electorate, in a cliffhanger election, voted for a pro- bailout government last Sunday. In spite of everything why are markets so jittery when the patient in sick bay is taking its medicine via austerity measures and is getting the best medical attention? This is because the real problem is not Greece, which only constitutes a small part of the European markets now Spain, and Italy.
As with Greece, eurozone leaders believe the solution for Italy is more government austerity − spending cuts and tax rises. It is no surprise that Italian government's debt, at 118 per cent of GDP is truly high, even by European standards.
Moreover, the large debts of the Italian government are nothing new. It has lived with the problem of a debt ratio exceeding 100 per cent of its GDP ever since 1991.As a matter of fact and really the problem is the heavy yoke to meet the principal and high interest payments on its existing debts. To add salt to the wound the Italian economy is stagnating. It is common knowledge that its bureaucracy is rampant, it is plagued by poor regulation, vested business interests, an ageing population, and weak investment, all of which have conspired to limit the country's ability to increase production. After all the outlook is grim for Spaghetti lovers.
Italy is uncompetitive which resulted in years of weak growth, as Italian workers find their pay is frozen, or even cut, nevertheless it has a long way to reach the competitive levels that they can claim to regain a price advantage over other EU economies. Pursuant to this agreement the Monti government, more austerity means more public spending cuts that hurt the economy moreover. It is a vicious circle. That means the market's loss of confidence in Italy and the recent downgrading by credit rating agencies could so then end up becoming a self-fulfilling prophecy.
If markets panic, and switch their money out of Italian debt into "safe" German debt, Italy is expected to pay seven per cent interest rates on bonds. It would need an enormous bailout that would over run the eurozone's current EFSF.