The way out of the sovereign debt crisis: a Greek road map or a Cretan Labyrinth?

The bailout of the Greek economy has become emblematic of the divergent policy measures and economic strategies deployed worldwide to address weakening growth prospects and worsening sovereign indebtedness. Efforts to monetize sovereign debt by increasing money supply via ECB government bond purchases are a visible example of the economic impasse that states find themselves in. While these monetary measures are increasingly perceived as the only policy options for governments, they exacerbate systemic economic and structural imbalances and pose intensifying risks to global economic security.

Measures that have been considered include, among others, stricter budgetary rules, limits on budgets and economic policies, creation of Eurobonds, and a move to a fiscal union. Barry Eichengreen, Professor of Economics and Political Science at the University of California believes that getting to a fiscal union would require revision of the EU’s treaties and issuing Eurobonds a political consensus that will take months to build. Europe, however, doesn’t have time. It is therefore critical, he says, that leaders distinguish what must be done now from what can be left for later.” He further argues that Germany and France can recapitalize banks on their own while countries in weaker fiscal position could appeal to the European Financial Stability Facility and the IMF if required. And then there are SWFS and emerging economeis, as well.

In the view of Dr. Alexander Mirtchev, President of the Royal United Services Institute for Defence and Security Studies (RUSI) International, the solutions sought by governments are less than optimal due to their focus on addressing liquidity rather than the underlying problem of solvency. As a result, the systemic imbalances that remain unaddressed continue to impact the global economic security framework. However, as Mirtchev indicates, these solutions are predominantly designed to maintain the social and political balances that exist. The question is whether these measures sacrifice future global economic growth.

Nouriel Roubini, Chairman of Roubini Global Economics claims that four major things need to happen to prevent a depression: first, “countries able to provide short-term stimulus should do so and postpone their own austerity efforts” (e.g. US, UK, Germany, the core of the eurozone, and Japan) and infrastructure banks should be created as well; second, “while monetary policy has limited impact when the problems are excessive debt and insolvency rather than illiquidity, credit easing, rather than just quantitative easing, can be helpful”; third, “to restore credit growth, eurozone banks and banking systems that are under-capitalized should be strengthened with public financing in an European Union-wide program”; fourth, “large-scale liquidity provision for solvent governments is necessary to avoid a spike in spreads and loss of market access that would turn illiquidity into insolvency.”

Until the EU addresses the question of political, economic, and financial integration, it will continue experiencing booms and busts with the grand experiment, which was initiated decades ago but requires radical adjustments in the new century. So, there is a map – the issue is whether the Minotaur waits at the end.

Source: The Gulf Today

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