Friday, 11 May 2012

Conspiracy Theory for your Greek Holiday

Much of the topics dealt with in this blog over its first six months were to do with the Eurozone crisis.  Looking forward, the next six months may be the same.  Strange as it may sound, one of the reasons for this is that many of Europe’s politicians want the turmoil to continue.  There are solutions that would considerably ease the burden of many countries in the grip of austerity measures but politics in Europe prevent their implementation.  To prove that this is not a weird conspiracy theory hatched by Your Neighbourhood Economist, let me explain.

One possible saviour for those in the midst of cutbacks would be something called Eurobonds.  Currently, all of the government bonds are issued by individual countries while, on the other hand, Eurobonds would be joinly back by all of the members in the Eurozone.  The benefit of this would be significantly lower interest rates on these bonds compared to those from individual countries as the Eurobonds would be backed by the whole of the Eurozone including the stronger countries such as Europe. 

The issuing of Eurobonds could be used to replace a large portion of government debt in such countries as Greece, Portugal, and Spain who are suffering under the burden of high interest rates, and as a result, are having to savagely slash their government spending.  But the stern Germans (and some other countries) are having none of it.  Their steadfast leader, Angela Merkel, is not keen on providing relief to the indebted countries in the hope that the pain will help the politicians there push through reforms that will make their economies more productive.  Such reforms are typically neglected when times are good and only get implemented during times of hardship and when politicians have someone else to blame.

It is like holding back food from someone who has grown flabby and pushing them toward starvation with the intention that this will make them change their ways and slim down.  But it is not something just for this dieter at this point in time.  Being tough on indebted countries now will make them and other countries in the Eurozone think before they build up debt again in the future.  This is also true of other pain relief measures such as the central bank in Europe taking a more active role in prompting direct or indirect buying of government bonds in Europe (as discussed in a previous posting - Economists save world (for now)). 

So it is a trade-off between short-term pain and long-term gain.  But that is not much comfort for the destitute who are bearing the brunt of the pain.  Needless to say, Germans are not popular among their fellow Europeans and the Greeks in particular.  Germans tend to flock to the beaches in Greece for their summer holidays but Your Neighbourhood Economist is planning to spend some vacation time in Greece on the assumption that it may not be so busy this year if many of the tourists from Germany stay away this year.  And it may even help a little.  I don’t need much more of an excuse to go back to the beautiful beaches in Greece.  Feel free to come along and spend a bit of cash as well.

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