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What lessons can the European Union learn from financial crisis in the recent past, let’s say in the latest fifteen years or so, and how can these be eventually applied to the current Euro crisis affecting, for the time being Greece and Hungary?
If we take into consideration the three major financial crisis of the past fifteen years – Asia, Russia and Argentina, we can immediately rcognize one important difference: all these crisis happened in emerging-market economies. Hardly any financial analyst or economist could even think the next sovereign debt crisis would be in an advanced country, or in Europe. Thath’s not all, though: three crucial things can be understood from these earlier crises, and their lessons is valuable to finding a way out of the current Euro crisis.
First, the Asian countries – Korea, Thailand, Malaysia and Indonesia – involved in the financial crisis showed that the way for a country to recover from a financial crisis is to devalue its currency – to a very large extent– and then to go for export-led growth. A tragedy, those years, a great move toward economic success if we look at it with today’s eyes: apart from Thailand, shaken by a social and cultural conflict, all these four countries are emerging political and economical powers in todays’ world.
Second, the IMF issues financial help to the countries hit by the crisis, but in doing this it acted as a mere debt collector on the name of Wall Street. The IMF, indeed, has no sovereign debt reconstruction mechanism and the loans it issued were not gifts: in the end, the IMF and other creditors were repaid by the crisis-affected countries and these countries then collected the money from their own taxpayers, who were, perhaps, the least guilty in the making of the crisis.
Third, we learned from Asia that default and debt write-downs may be a bad idea after a financial crisis. A debt overhang poisons recovery, since the need to repay very large loans leads to tax increases and cuts in government services which delay a return to growth. But when recovery comes, foreign direct investment will assist, bringing new technology and access to foreign markets, and helping exports to grow rapidly again. It is good to avoid default to make this investment possible. Messy legal fights about debt write-downs make this difficult, and so impede the recovery process. Asia recovered rapidly without debt write-downs.
How can we apply these three lessons to thinking about Greece and Hungary?
First of all, any devaluation of the currency is not possible: the Euro is not limited to Greece, it comprises fourteen more countries, and the Greek economy represents a very small share of the total Euro-zone economic capacity. Hungary could, for it is not part of the Euro area. It is strongly and deeply linked and connected to it, though, and a devaluation of the florint – the Hungarian currency – would affect the Euro and, most likely, cause a sort of domino effect involving Portugal, Spain, Ireland and, possibly, Italy.
The huge bailout of Greece by the IMF and the European Union, led by Germany, means that Greece will not need to borrow again from private financial markets for three years. During this time, bankers and other financiers who lent to Greece will get their money back. The IMF, and even more importantly, European taxpayers, will end up holding European debt. And Greece will get a three year period to put its house in order. In due course Greece is meant to repay these official loans to the IMF, to Germany and to other EU countries.
Hungary has not come to the point of needing assistance for the EU or from international institutions. As a matter of fact, its crisis seems more the work of media inspired by external political and economical environments eager to play against the European Union, than the consequence of a real, actual economic crisis.
This crisis has deep political implications for the European Union, who is now facing not only a deep political challenge, but it also faces a challenge to its fundamental economic principles.
Many financial analysts now believe the Euro-zone will break up, unless there is very much greater political and fiscal integration within Europe, to prevent the kind of fiscal laxity which has driven Greece to the edge of this financial precipice and Hungary into a dangerous area. Countries in difficulties will need to accept much greater intervention by the European Commission in the conduct of their economic policy. Those who live in federal countries, like the US, Australia, and Canada, recognise the inevitability of such ‘federal intervention’ But the political obstacles to achieving this within Europe are very large.