Thursday, July 16, 2015

Picking up the tabs for Europe

Read a joke on the internet yesterday; “A Greek, an Irish, a Spaniard and a German go to a pub and have a fun time… at the end of the party, the Greek, Irish and the Spaniard put up their hands for not having money and finally it was up to the German to clear up the mess”. Doesn’t sound funny right? The joke in fact is that this is the scenario that is currently running across most of Europe as it looks down the barrel of the financial crisis that has the potential to threaten every single country.

It is funny in a lot of ways that the most powerful and resilient economy in Europe today is one which has actually experienced some serious political turmoil, change of guard, partition and unification all over the last century. Germany has been subject to paying up for the wars in Europe and has seen inflation that has been just mind boggling during the Depression. In the recent past, Germany has faced the difficult balancing act of offsetting debts of a low industrialized East German economy in the 90’s. Yet again, it is Germany which is having to so a salvage – this time it is most of Europe.

So where did Europe go wrong?

Through the ages, Europe has always been a restless baby. They have fought for power and control within the bounds of the continent or its colonies. It is not uncommon that while Europe made the best out of the Industrial Revolution, the monarchies never really allowed any country to have the relations that kept trading easy to do. It was the post-war Europe where countries finally allied for better relations in trade and removal of tariffs at many levels that got them back on track.

The end of the cold war and the unification of Germany in 1989 gave the idea of a unified free trading and economic zone of Europe as a whole a firm rooting. A common currency, the Euro gave a lot of member nations a tough time marking their own currencies at parity. But this was just a hiccup as in the long run, it ensured that now every member nation had easier access to resources and facilities in better developed nations and also borrow finances to fuel their economic development.

Sadly, this was the space where most countries have got it wrong. When taking a bank loan, we are always asked to issue a collateral or bring in a guarantor to support.  It is a further must for the two to be presented if your own credit rating is weak. The smaller countries like Greece were never in a shape to manage their global debts against their own incomes (usually taxes). But with easy access to global finance and backed by the fact that they are a part of Euro, borrowings increased beyond manageable levels. Public spending on government funded projects, pensions, tax waiver and all kind of populist policies have meant the money borrowed is never coming back.

It wasn’t surprising that when the slow down hit the world in 2008, it was the smaller economies in Europe that had money either invested or borrowed from the US went down. With United Kingdom not a part of Euro and France playing a second fiddle; it was up to Germany to assume the role of big brother and pull up the debt of all these failed economies. But not without conditions towards imposing austerity measures to be implemented by the countries failing to bear its own debt.

But this is easier said than done. When Government implements measures to cut down spends, it means that people are likely to lose jobs, spend less and in turn end up paying lesser taxes. Less tax means the government earns less and cannot repay its debt. What this means is that even with stronger economies in the Euro picking up the tabs and bad debts, this cycle might not end. This is a space where today we have 17 countries linked by a common currency and trade agreements – but the political will, tax structure and the ways to earn an income and spend are vastly different among the member countries.

The Utopian plan would be a uniform currency, tax policy and governance style across the member nations – which is definitely unpopular on a political front. But one thing for sure, the vicious cycle of debt ridden economies has begun. People are going to have a tough time and recoveries are going to be slow and harsh. As for the immediate, someone is going to have to step in and pick up the tab for all of Europe.

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