Tuesday, April 10, 2012

The Euro zone still deep in the dumps

I couldn't help but notice that after several years of struggling and brainstorming, the fate of the euro still remains uncertain.  The European currency continues to walk around like a very sick patient looking for a miraculous cure. Whereas its various parts are being periodically swathed, nobody considers treating the poor patient as a whole. Unfortunately, the euro zone is still going through a serious sovereign-debt crisis and growth stagnation.

There are actually very few solutions to boost the European economies. Most governments in the euro zone have been recently tossed out by budget deficit and eye-watering costs. The dire economic straits are currently emphasized by visible lack of fiscal unity. There is still a huge gap between old and new members on so many levels. Most European citizens cling to the hope that a certain federalism will eventually emerge to keep things going, but that could take another decade or so.

At this point, the net foreign borrowing in the public, as well as in the private sector, remains problematical. Indebtedness prevents governments from applying the usual fiscal incentives, such as currency devaluation and monetary policy. Structural reforms are out of question, at least not in the near future.

Countries dealing with budget deficit could reduce payroll taxes in order to minimize labor costs. Otherwise, they could take the painful decision to raise VAT and cast down imports. It seems like globalization can really gobble up a big chunk of economic perspectives for the European markets, favoring other ascendants, such as China. On the contrary, countries dealing with consolidated budgets should slow down their rhythm by letting inflation run higher. The problem with such countries, as Germany, is that they refuse to take initiative for an eventual unity and are afraid to risk their own competitivity.  Although Germany often suggests political unity, desired by most European leaders, it dodges the idea of fiscal unity, so necessary in the future, to maintain EU afloat.

Even countries that have already received considerable bail-outs over the past two years find themselves still deep in recession and may need second or third aids. EU leaders are currently evaluating the possibility of raising the amount of rescue funds, as a viable solution to save the Euro zone. Many economists highly doubt that would help. The consequences for each of these beneficiaries can turn out to be disastrous in the long run. 

Europe appears sluggish and unprepared to face another euro crisis and it is almost swamped by the harsh perspective of having to give up on its dearest currency. But what are the alternatives? Almost non-existent. The euro must survive in order to avoid an economic chaos and secure the magnificent euro project. The only option for Europe now is to square off and focus on how to make the economy grow, even in painful circumstances.