The state of the Eurozone countries has increasingly seemed to be on the verge of plunging the world into further financial meltdown over recent weeks with more rumblings from Greece and alarm bells ringing in other countries such as Spain and Italy. It looks ever more likely that France and Germany won’t be able to fully support the economic union that they dominate, coupled with America’s ongoing debt crisis the perfect storm could be in the offing.
The question does need to be asked as to why the Eurozone was set up in the first place. It is consistently muted that it is far from the perfect area to have a unified currency mainly due to the fact that the cultures are diverse leading to barriers such as languages and legislation hampering the dynamics of the joint economies. In the ideal union the member countries would almost work as singular unit so that there was free movement of resources and capital throughout the union thus increasing the synergy of the affected economies. Having synergy in the operation of the member economies is important as it allows the singular monetary policy to be beneficial to all the countries at the same time. Imagine as union where two countries are out of phase in the business cycle. Country A booms while country B is in recession and vice versa. The monetary policy that would bring country A out of recession would, most likely, cause massive amounts of inflation in country B as B is not suffering the same deficiency in actual growth as A.
The above scenario is closer than you’d think to how the Eurozone is structured at present. Take for instance the 2010 figures for GDP growth in Greece and France. Greece had a 4.5% fall in GDP whereas France’s GDP rose by 1.6%. Greece would require some extensive lowering of interest rates in order to stimulate demand whereas this same measure would hamper France’s fragile growth. As France is one of the major players in the Eurozone is is unlikely that France would sacrifice it’s own economy in order to help countries such as Greece and so the monetary policy set in the union would likely be more favourable to France’s needs (hence why Greece is now struggling so much in 2011 along with many other countries). I’ve started to come to the realisation that, with the levels of government debt relative to GDP currently leveraged in a lot of major countries, cuts in government spending are not enough to sort out the crisis and, realistically, growth needs to occur in order for the debt to be at a reasonable level for cuts to be beneficial.
This realisation does not however justify en masse fiscal indulgence. Instead it requires intelligent stimulations and investments which provide opportunities for growth without jeopardising the overall objective of debt reduction. Thus the plan in the US set out by the
Republicans with a mixture of cuts and tax breaks has the right sorts of ideas. The cuts will help to keep the debt manageable and the tax breaks will promote consumption and investment within the economy to help provide the ever elusive economic growth that is so desired in modern post-recession economies.
The countries in the same bracket as Greece in the Eurozone have never been given a real opportunity to have organic growth recently as they have little control over their own policy. Thus they now rely on cuts and multinational aid just to survive. I feel that a good plan in the short term would be to reinstate monetary control back to individual countries so that they can make personalised decisions to benefit each separate economy. Hopefully the limited flow of resources and capital would actually work in the Eurozone’s favour in this case as the monetary decisions could be able to be isolated partially between countries. This would be a decision with a view on the eventual break-up of the Euro currency and a reversion back to a more dynamic currency system that is more beneficial to the area.