Euro burning Europe or is it the other way around?

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euro sovereign debt default crisis

Few years ago, a small rural town in Spain twinned with a similar town in Greece. The Mayor of the Greek town visited the Spanish town. When he saw the palatial mansion belonging to the Spanish mayor, he wondered how he could afford such a house.

The Spaniard said: You see that bridge over there? European Union gave us a grant to build a two-lane bridge, but by building a single lane bridge with traffic lights on both ends, this house could be built.

The Spaniard visited the Greek town the following year. He was simply amazed at the Greek Mayors house laden with gold taps, marble floors and marvellous furniture. When he asked how this could be afforded, the Greek said: You see that bridge over there? The Spaniard replied: No. There was no bridge to be seen…

In the last few days, we’ve seen the dumping of Greek, Italian and US bonds. In fact, they were selling almost anything they could get their hands on. These were all crystal-clear signs that the world is heading for a new collapse. What protective steps need to be taken before the anticipated mini crash, is the worry of the global investors.

Today it is Italy. Yesterday it was Greece. But why Greece?

Greece, the birthplace of democracy, has been living beyond its means even before it joined the euro. Its rising level of debt has placed a huge strain on the countrys economy. The Greek government borrowed heavily and went on a spending spree after it adopted the euro. Public spending soared and public sector wages were practically doubled in the past decade. It has more than 340bn of debt for a country of 11 million people, about 31,000 per person. Roughly 155,000 dirhams.

However, whilst money has flowed out of the governments coffers, its income has been hit by widespread tax evasion. Practically the government was unable to collect tax as the administration was extremely corrupt. You pay a part of the bill to the concerned officials and your tax liability will be ignored. On the other hand, the cronies were rewarded with high paying jobs and contracts. Alas! the word crony has its origin in Greek words khronios or khromos from 1656.

When the global financial downturn hit the world, Greece was ill-prepared to cope with it. It was given 110bn of bailout loans in May 2010 to help it get through the crisis and then in July 2011 it was earmarked to receive further 109bn. Still that was not considered sufficient. Another summit was called in October in Brussels to solve the crisis once and for all. But the game still goes on. Greece is a solid example of how a corrupt administration can ruin the nation.

Today it is Italys turn. According to the Economist magazine, European Council President Van Rompuy sent Italian Prime Minister Berlusconi an early draft of the last European summits conclusions few weeks ago, making reference to the specific commitments made by Italy and Spain.

Berlusconi telephoned him saying being singled out in such a manner was scandalous. The Italian Prime Minister insisted that his country’s fiscal position, with a primary budget surplus (before interest) and low private debt, was healthier than that of most other euro-zone members.

He also argued that Italys high debt was the product of the past, accumulated by previous Christian Democrat and Socialist governments for which he could not be held accountable. I have always wanted to carry out reforms, Berlusconi told Van Rompuy, to which the European Council President replied: Silvio, its time to make your dreams come true.

Europe is in deep chaos right now. If a company is worth $100 and has a debt of $110, then it is insolvent. If the income of a company cannot cover its debt obligations, it is bankrupt. Why should the EU be any different? The European Union countries that are over leveraged have a solvency problem.

But EU began with denial: There is no problem, everything is normal. Then it moved to anger: “Damn those profligate Greeks. Then to bargaining, which still has not been successfully concluded with Greece or Italy, and is now entering the stage of depression: “Oh my god! we are doomed. This is going to push Europe into a long recession unless they settle it sooner than later.

Some analysts opine that if this expected global wealth destruction comes to pass, history books will record that it was caused by a decade of really inept politicians in top jobs. Europe has leaders like Berlusconi getting into trouble with prostitutes all the time. Perhaps his high priority was his erotic bunga-bunga parties than Italian economy. He was the only head of state in the world who defended his grisly affairs with pride. To make it worse, he is the Prime Minister of a country where the leader of Catholic Church, Pope Benedict XVI, lives.

Besides, there exists in-fighting between European leaders like Sarkozy and Cameron. When David Cameron expressed his skepticism over the eurozone crisis, Sarkozy in turn told him to shut up. Also, when President Obama commented about the eurozone crisis, Germany harshly asked him to put his house in order first.

It is a must for European countries to get together and pull the caravan out of the muddy land. Otherwise it will become a tar pit, an area in which natural bitumen is collected and is exposed at the earths surface to trap animals and preserve their hard parts as bones or teeth. One can see a tar pit in Los Angeles near Hollywood.

Italy, Europes third largest economy, the worlds eighth largest and the third largest bond market, could have reformed and liberated its innovative economy but it did not and people know who to blame.

Berlusconi’s exit triggered an explosion of joy in the Italian capital with people uncorking bottles of champagne, dancing in the streets and honking car horns.

Thousands of people stood before the President’s house in Rome, hooting and shouting Buffoon! Go Home! Ciao! Dont come back!

Were all delighted. Weve had enough of this person who always acted in his own interests. Italy is headed for a better future, 50-year-old Tommaso Romito said, while muffled up in a white scarf on a cold night in Rome.

Portugal and Spain mistook property boom for economic growth. Spain’s building bubble that popped in 2008, has more international airports for commercial flights than any other country in Europe: 48 public and two private. In all, there are some 20 airports that handle fewer than 100,000 passengers a year, well below the 500,000 they need to be profitable, according to Germa Bel, an economist at theBarcelona University.

Greece could have discovered how to collect tax. Its leaders preferred to cook the books and kept favouring their henchmen. Mind you, this is the country that staged the 2004 Summer Olympic Games at the cost of 10bn Euros. Many proposed constructions and facilities were behind schedule causing anxiety to organisers.

Irelands leaders were handful of real estate gamblers and they will never be out of the property casino. Even so it is incredible how such a small number two dozen managed to create the financial singularity called ‘Anglo Irish Bank/INBS’. Germany and France could have spent their efforts actually improving European competitiveness and policing eurozone budgets. Instead, their efforts were to promote the failed EU constitution and the Lisbon Treaty.

Even if the EU has the ability to subsidise these countries, Germans asks why should we pay? Most of the German investors are sick and tired of the bailouts. They resent having to pay for their neighbours spendthrift ways. They are worried about the risks to their own economy and their interest is in gold and other investments for wealth protection.

If the ECB exceeds its mandate and assumes the role of lender of last resort, it could in fact save the euro as early as tomorrow but parliamentarians in Germany will certainly challenge the move in court. Because according to Germany, the greatest threat Europe is facing at the moment is inflation. Berlin insists that it is not the breakup of euro, destruction of the single market and global recession but inflation.

There will be talk of the Fatherland ditching the euro altogether. The political uncertainty will probably make the situation worse. Instead of saving Italy, it might end up pushing other countries over to the edge too.

Once exhausted of options, troubled eurozone countries try to get bail out money with conditions and strict monitoring by the International Monetary fund (IMF). Finally, if the Europeans cannot put their heads together, only the IMF will have to come to save the eurozone.

While everyones eyes are on Europes crisis and the Super Committee in Washington and the ongoing budget debates, the biggest threat to the Western nations is being ignored or unidentified.

Beijing just started trading the yuan with the Russians. Interesting to mention here is the fact that Sri Lanka too made yuan a convertible currency. It is another giant step forward for the Chinese currency and another threat to the sick US dollar. China is getting ready to devalue the US dollar by revaluing yuan higher. The rise of yuan and the fall of dollar are inevitable. This one single event can affect the wealth of America hard and of Europe to some extent.

The euro was created to replace the dollar or to become second to the dollar in world trading. The idea behind was that America was spending heavy on wars and consumerism. Now the Chinese dragon is breathing fire near the Western tents as a third country. In few decades, Renminbi yuan might become the world currency, even if the West does not adapt to proper financial control.

According to Jacques Attali,leading economist and former adviser to French President Franois Mitterrand, Europe has four alternatives:

(From absolute worst to very bad):
1- Do nothing alternative. Result: Catastrophic failure. Not to be discounted. The issue here is not that Europe doesnt want to do anything; the problem is, can it do anything?

2- Printing money. Result: Inflation. Germany wont like it but at this point they may not have any choice. Besides a weak euro is one hell of a bonus for their high quality exports.

3- Some kind of “Special Emergency Fund”. Result: More debt. Countries would have to contribute to it.

4. Issue “European bonds”. Result: Unknown. Europe, as a legal entity, has no debt. It could levy funds through some VAT tax. That debt would then be invested in growth. Without GDP growth austerity is not sufficient.

Undoubtedly, Greeces troubles have become the most urgent matter for the eurozone. The 27 EU member states now fear that a default by Greece could set off a financial contagion that will spread throughout the region.

This could be the last straw that breaks the back of EU but this is just part of the story. Germany, EUs most powerful member, is losing patience with its troubled partners. And theres only so much the EU can take before individual countries either give up their sovereign rights in favour of a stronger Europe or dump the euro altogether.

America is already hit by its devils and is feeling the heat of eurozone crisis. Dow stocks are quite uncertain like the New York weather. One day up and two days down has been the case.

Is Europe burning euro or is it the other way around? Let us wait and see but there is a smoke. The future of the euro indeed of the European Union itself is at risk.

Written by M.S. Shah Jahan, CEO of Taipan Trading Company, a Gem and Precious Stone Consultancy Company based in Colombo, Sri Lanka.

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