Euro Zone Crisis

Euro is created as a common currency among first 12 European nations and then expanded in to others. The efforts for the European common market/ currency started since post 1950 as an effort by the marginalized European colonial powers post world war II which saw the rise of united states as a world financial power house and dollar as a medium of petro-buying. The effort with the collapse of gold backing of dollar in 1971 saw the first oil crisis speed up the need of an alternate international currency to trade in as an alternate of petro dollar. Every such effort for an alternate international currency was shot down by US either overtly or covertly, as US gain tremendously printing and selling dollars to the demand of petro products.  This also made US dollar an international reserve currency, a position used by the US to bring its enemies to the knees by freezing their dollar deposits.

So since 1980 onwards many oil producing countries wanted to shift to an alternate currency/barter. Any such move reduces Us influence internationally currency wise, domestically economy wise. The more petrol is demanded, more dollars are demanded worldwide thus fueling the domestic American economy growth.

The American greed

The flow of dollars into US economy resulted in terrific real-estate boom which peaked in 1980. In order to show the myth of perpetual American economic strength the unholy alliance between mortgage brokers, private bankers and wall street big firms started subprime lending (lending below 0% interest rate without bothering inflation rate) and securitization of debt (selling housing mortgages as bank backed tradable stocks)  first in wall street’s then everywhere in the world. This process is called derivative markets.  As against worlds total GDP of $ 50 trillions a whopping $ 150 trillions derivative market came into life,  sowing the seeds for the beginning of the current financial doom which is now known as Us melt down  in 2008 euro zone crisis of 2012, and if not prudent will be called Indian crisis of 2020.

Europe in perspective

While US clandestinely and algebraically releasing the toxic debt on the world economies (especially the European and Asian ),  the western European nations built robust solid manufacturing economies. This happened in spite of stiff and tough competition encountering from emerging asian tigers (Japan, south Korea, Taiwan, Malaysia  etc.. ) and china. The combined economic strength of  western  European nations surpassed the US GDP  by the end of 1980s. While the US  was sucked into fathomless vortex of debt (public, private and consumer), and became net importing country the western Europe emerged as leading exporting block.

The birth of euro

With the invigorated economic strength western European nations pushed to create Euro to safe guard their export interest against dollar. With the dissolution of the soviet unioin and end of cold war the debt stricken US was unable to resist the creation of Euro. The birth of euro zone thus euro saw  the gradual weakening of the dollar both as reserve currency  and as a currency needed for buying petro products. Gradually over period of a decade many countries shifted to euro trade thus increasing demand for euros thus strengthening further   euro zone. The economic miracle was so tempting that many other European countries wanted to join and share the pie of prosperity. The euro zone gracefully embarrassed few of them.

The Euro zone crisis

With the economic strength and the prosperity most of the European banks unknowingly absorbed monsters proportions of US toxic debt thinking it was a genuine investment. Only in 2008 when the German banks wanted offload some of their real-estate investment of US (translation toxic-useless investment) in US it was a revelation for US regulator about the extent of fraud  committed by the US banks, insurance companies, wall street  brokerage firms, which resulted in the US economic meltdown and  bankruptcy of all major US banks, Insurance companies, brokerage firms plunging along with US entire world except china and India into global financial crisis.

Figure 1. Toxic Debt Write downs Comparison. Source: International Monetary Fund (2008)

Though European economies are able to initially withstand the crisis by postponing the revelation of the extent of their exposure to toxic debt eventually they have to disclose their liabilities.Added to this with the economic crisis US imports started to fall down drastically resulting in the shrinkage of export markets like euro zone, china pushing them into rescission.

In addition, during the face of economic strength the liberal admission of weak European member countries into euro zone resulted in high interest lending to these newly merged member countries (ranging from 6 to 18%) became a liability on the newly joined member countries once the euro zone entered into rescission because of the US toxic debt.

With the shrinkage of real economies in the newly joined member countries both the debt and interest portion taken as a part of merger became unbearable.

Figure. 2. GDP Debt comparison

One by one and quarter by quarter  a situation arose  with in the newly joined member states where by they are unable to pay even interest leave alone principle borrowed. This resulted in weakening of the Europe currency which again had effect an exchange rates and exports translating into inflationary pressures in member countries, as theorized by the famous American economist Fisher.

The primary or old members of euro zone countries were not able to provide enough funding to rescue their new member economies because they saw all of their wealth vanished two years before in their investments in US toxic debt.  Rather than revealing their faults and current economic weakness these main eurozone countries demanded the new member states to follow a solution called austerity measures- lay of workers, cut wages, increase taxes, privatize  more. These very proposals resulted very violent demonstrations in the member countries. This saw one after the other member countries going economically belly up starting with Greece, Italy first and Portugal, spain following in the line.

The extent of the crisis             

We already known that floating toxic US derivative debt (shared by Europe ,US  together) already 7 to 8 times more than  all of the world GDP which currently stands at $ 50 trillions . In addition to that the bail out of Greece needs $900billion, Italy needs $2 trillion, Portugal needs $ 1 trillion and Spain needs couple of $ trillion. This number increases in future with more euro countries going bankrupt..

  What is the solution?. Where is the money?

Traditionally there are two solutions injecting more money into the economies which will increase inflation and worsens the situation further leading to total economic collapse of euro zone and US.Issue long term  bonds and finance the current crisis but they are none to buy those bonds in melting down economies.

Additionally there are two more solutions first to borrow from (plunder/steal if we were living in colonial era  at least 60  years back )some country/group of countries those have surplus with them. Second develop new export markets for European, US goods which could in the long term save the economies of both euro zone and US.

As the first two traditional options can  never be availed both US and euro policy makers are looking at the later additional options. They are negotiating $1.5 trillion US loan/bond issued with china with an option of increasing the same  up to $10 trillion. This is a short term solution. As this loan/bond issue will open  the euro zone markets for Chinese goods. This may further reduce job prospects in euro zone and US. So the second solution is being worked out by forcing India (as part of deal worked out in US couple of month before between US authorities ,European authorities and Indian representatives headed by UPA chair person in New York hospital) to open FDA in India in single brand retail sector (Italian single brand fashion outlets) to save euro zone and in multi brand retail sector (like wall-mart multi brand out lets of US zone).

Even if the FDA is allowed in the cities more than 10 Lakhs population and if there are 100 such cities in India the combined population of all these cities will be 10 crores equivalent of combined population of Canada, Australia ,  New Zealand  and South Africa or close to 1/3 of US population.

Implications to India

Every $ billion that is sucked out of India will stabilize 20000 jobs either in euro zone or US zone. With job/wage guarantee multiplier effects sets in US and euro zone economies. The extent of $ 1 billion non availability of in Indian economy will contract the economic activity in India b y $ 60 billion (the velocity of rupee in India is 1 to 60, if anyone understands). With India becoming consumer market of US and euro zones, the inflationary  pressures of these countries are transferred into India leading into hike in inflation affecting overall price index of India. This with contracting economic activity will only shift the euro and US zone crisis with all its ill effects into Indian crisis by 2020. This is what our leaders promise of super power statuses. A super power in economic crisis no where to go by 2020.

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9 Comments Add yours

  1. Praveen Ch says:

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    1. bharathiya sandesh says:

      thanks alot for ur response.. sure as a sequence of this article one more is going to come with in two days…

      Like

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