Europe is once again in the headlines as investors closely monitor the situation in Greece. The recent Greek elections saw extreme fringe parties gain votes and seats at the expense of the more traditional parties. The election was so fragmented that no party was able to form a government, leading to new elections in June. With the election turning into a referendum on Greece’s membership in the European Common Market, the stakes are now quite high. If Greece is unable to elect a stable government (coalition or otherwise) that will support the agreed-upon rescue package, the result could be the withdrawal of Greece from the E.U.
The cause of this problem is not just the levels of sovereign debt of some European countries, but also the German-led solution to the crisis. Germany had in the past aligned with France to force fiscal discipline on the weaker members of the eurozone collectively known as the P.I.G.S. (Portugal, Ireland, Greece and Spain). Rather than resolving the crisis, the draconian tax increases and government spending cuts had the opposite effect, cutting growth and tax revenues and further aggravating an already fragile situation. Civil unrest has been the outcome, with youth unemployment now at 50% in both Spain and Greece.
With Sarkozy, the German Chancellor had a willing ally, but the election of François Hollande has now provided a counterbalance to Germany. The differences in approach are quite clear with the recent discussion concerning the issuance of eurobonds. The concept of issuing bonds backed by the eurozone rather than by individual countries has been supported by both the IMF (“International Monetary Fund”) and the OECD (“Organization for Economic Co-operation and Development). The issuance of eurobonds would aid weaker countries such as Greece by in effect having the entire eurozone back the issuance. Although countries such as Germany would pay a higher rate of interest, this solution would be of immediate benefits to the region by providing stability in the debt markets.
Germany is opposed to this initiative arguing that in the absence of stronger fiscal controls would encourage countries such as Greece to continue to mismanage their financial affairs. This “survival of the fittest” approach could have disastrous consequences for not only Germany, but the world economy as well. François Hollande is in favor of the issuance of eurobonds and has started to form an alliance with Spain and Italy. He is also in favor of a more moderate approach to resolving the debt issue which includes spending on infrastructure projects. Barak Obama has joined in the discussion arguing for a more stimulative approach to resolving the issues.
The election of a counterbalance such as Hollande may indeed change the fate of Europe as he is providing an opposing view that hopefully will result in a compromise solution. The debt crisis did not occur overnight and will take many years to resolve. Greece is a clear example of the damage that can be done to the social fabric when governments adopt solutions that are unpalatable to a large part of the population.
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