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Posts Tagged ‘Money’

(Author’s note: I was writing this article during the summer so it might not be perfectly new but the points I make remain)

The election of François Hollande as the president of France has been an important turning point. He is a Head of State who is openly anti-austerity has been negatively portrayed by The Economist magazine’s article, which called him “rather dangerous”.

The election of François Hollande has been a sign of a current trend in Europe that is going against austerity.  Austerity across the EU is now in its third year almost. Some countries are feeling the pain of austerity, especially the PIIGS, which have all had to be bailed out.

With all of its current problems, the last thing Europe needs right now is a complete move away from austerity and fiscal tightening to a more expansionist monetary policy and more borrowing. These policies are, among other reasons, what caused the current crisis in the first place.

First of all, with the exception of the PIIGS, no real cuts are taking place or have actually taken place in Europe. The graphs on this blog post of an economics think-tank in Slovakia show that in reality no cuts took place. The only thing that happened is that the rise of government spending decreased. But it is still increasing nevertheless so there is no real austerity. In some EU countries governments were actually spending more than they had before.

The public across Western Europe was upset about the austerity and many politicians claim that it doesn’t work. What is really felt, however, is not the pain of the austerity since there isn’t really any, but the pain of the continuation of the economic crisis. The recovery of economic activity in 2010/2011 was largely due to expansionist monetary policies across Europe. Governments spent a giant amount of public money immediately after the start of the 2008/2009 crisis to stimulate the economy. But this kind of Keynesian stimulus only works as long as the government money keeps flowing. With every government dollar that flows into the economy the threat of high inflation increases.

Now, years later when governments started to cut public spending so that they do not run up huge public debts the economies are starting to slow down and the global outlook isn’t rosy. This has mostly manifested itself in fears of the so-called “double-dip” recessions.  These “artificial economic revivals” did not last and genuine economic recovery will not arrive easily.

In short austerity isn’t working because it hasn’t really been tried out. Germany and France have huge public debts, although still incomparable with the PIIGS.  There is one country in the EU, however, that has resisted this tide of “no real austerity” or “just a bit of austerity”. The Baltic state of Estonia has been making headlines around the world in being the “prime example” of austerity. Estonia is the only country in the Eurozone that is experiencing an economic growth, is having a budget surplus and its debt is actually decreasing. No other Eurozone country has all of these three things happening at the same time.

Estonia has felt the real pain of austerity. However, throughout the years the country’s inhabitants got closer together and got through the tough times. The politicians cut their wages by around 20% in order to persuade the public to go through with the tough fiscal tightening measures. Now the economy is recovering and it has very good prospects. Estonia adopted the Euro in January 2011 when no other country even considered joining the common currency union.

Estonia is the only country in all of Europe, which meets the economic criteria of the eurozone and the political and military criteria as a NATO member. The World Bank has graded it as the 24th country in the world in the ease of doing business ahead of France and Italy. Estonia’s economy might face problems in attracting FDI because of being right next to Russia, which is the reason why it was eager to join the North Atlantic alliance in the first place.

Estonia deserves a lot of respect and praise for its sacrifices. With a population of just roughly over 1 million, is certainly is a dwarf when compared to the biggest and the oldest EU members such as France or Germany.  The Estonians have chosen the “hard way”. After a tough and painful crash and a recession in 2009 and 2010 the country looks ahead to a highly potential bright future.  They haven’t decided to borrow more money for which they would have had to pay for later and which would have hurt much more than the austerity they went through.  Estonia’s Baltic neighbors: Latvia and Lithuania have chosen a similar economic policy as a way to sort out the crisis.

In a way, the two opposing ideas in the Eurozone are whether it is better to chose an immediate crash which is then followed by a real recovery or pursue a mild long recession made possible by more spending and borrowing which only gives the temporary impression of recovery. Estonia chose the 1st way which is tougher and certainly less attractive with the public.

Estonia should be an example for the European Union since it is one of the few countries that actually did try austerity as a way out of this crisis. It should also serve as an example in NATO, having kept all of its membership requirements.

These days this “new” EU member (having joined in 2004) is showing the right way.  The “old” members such as Italy, Spain, Portugal or Greece are facing grave problems. Germany and France, which are currently leading the way out of this crisis, have huge public debts and do not lack problems. Why should they have all the credibility?

Perhaps once in a while a “new dwarf” should be listened to or respected and given just as much credibility as the “old giants”. 

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It won’t come as a surprise to anyone today that Europe or more specifically the European Union (EU) is in trouble. Everyday new events linked to this crisis are being reported in the media from all over the world. In this post I would like to express my opinion about what is going on and maybe clarify the whole issue a bit.

What the EU is starting to resemble more and more these days is actually a loose Confederation of Nation-States rather than a real European Federation that speaks with a unified voice as it was supposed to after the Lisbon Treaty that passed in December 2009. Only 4 months after the treaty was passed and 18 months after the start of the Global Financial & Economic Crisis began, this whole European economic mess started. It all started in the same place where the current European Civilization did very long ago, in Greece.

I named this blog post the Holy Roman Empire of the European Nation(s), because the EU today is starting to look more and more like the very old state called Holy Roman Empire of the German Nation which existed between 962 to 1806. (To find out more than just the Wikipedia page, you can also click here.)

The EU is not a federation because it doesn’t speak with one voice. Nobody can really figure out who (if anyone, really) is in charge of the EU. Is it the European President Hernan Van Rompuy, Head of the EU Commission José Manuel Barrosso or the French-German duo “Merkozy”? Nobody really knew who was in charge of the Holy Roman Empire either.

I remember that during one history lesson our teacher told us that the position of the Holy Roman Emperor, (the ruler  who was formally in charge of that Empire) was just a representative figure and somebody who would not hold any real power, but only a prestigious post. She then went on to mention that it was a position best compared today to the office of the Head of the European Commission (José Manuel Barrosso). She said it before the Lisbon Treaty was passed and before Hernan Van Rompuy became the EU President. Today I’m sure she would say that one of the two men ressembles the Holy Roman Emperor the most.

The Holy Roman Empire was, in reality, a loose confederation of smaller German States, where each had a good degree of independence. The German Princes were interested in exactly that. Today, the EU is becoming more loose and loose. Until 2008/2009 it seemed that Europe was moving more and more towards an eventually unified entity. That was the trend. These days the trend is opposite. Previous national and regional agendas and tendencies are becoming more obvious. The biggest problem of the EU today is the Eurozone Crisis, but the fact is that not all the EU members actually use the common, Euro, currency. The EU has within itself a free travel area called the Shengen Area. This allows European citizens to travel freely and easily within Europe without a need for Passport. However, not all the EU members are a members of this group either.

The European Union can thus be divided into the countries that have the common currency (Eurozone) and those that don’t and into countries that are members of the Shengen Area and those that aren’t. Some countries aren’t members of either (UK, Romania, Bulgaria, the last two are supposed to join eventually). The latest British decision to VETO another EU Treaty meant that UK will be out of future EU agreements. Some countries such as Poland and Czech Republic announced that they aren’t interested in joining the Eurozone in the foreseeable future.

The EU, thus, looks more confusing and loose and non-united than ever. But, this does not mean that before it was more united or that it is less united today. It is just no longer moving towards unification as it was until 2009. The EU is just as united as it was in 2009. New problems and challenges, however showed differences which were always here but were not apparent. The Eurozone Problems are being solved by Germany & France, while other problems such as the question of Democracy in Hungary is solved on the EU level from Bruxelles by the Commission. This shows again a duality of leadership. Some things are decided on the nation-level, some still on the EU level and some countries (i. e. UK) remain more or less independent.

But, today there is still a talk of a common European identity or at least of an EU-Identity. So, since Europe still is unified through the EU but loose within it into nation-states and other groups it can really be considered a unified confederation but which is loose and whose members are rather independent. Exactly a kind of a Holy Roman Empire of European Nations. Or for those who strongly believe in a European Identity, of a European Nation.

Concerning the Eurozone Economic Crisis and the Greek Economic problem, based on my economic knowledge and common-sense, I think that Greece will eventually default. In the end, I do remain cautiously optimistic about the EU’s and the Eurozone’s Future. The Euro will survive 2012 and the future in tact. It will however be different.

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For those who are interested in the coverage of these issues, a very good source is The Economist’s Website on Europe News and its Charlemagne Blog.

Another good source and a way to see Canadian Perspective on these issues is the Broken Europe Section at The Globe and Mail.

I wrote 2 previous posts that do touch the EU issue. One about Poland and the other about Slovakia.

Finally I thought I would add some Cartoons showing this European Crisis.

Enjoy!

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I was originally planning to have my next post about something else but because of the recent day events I decided to write quickly about an important current event. This post is quite long so if you want to skip to the point just scroll down towards the end.

In the recent days, Slovakia, the place I proudly call home, became world famous. This didn’t happen in a positive way however. We did not win the World Cup or anything.

Media from all over the world reported on how Slovakia is the only country in the Eurozone (countries within the European Union (EU for short) that use the Euro currency) that has not yet approved the European bailout mechanism or the European Financial Stability Facility (EFSF, for short).

Now thanks to this vote the ruling government in Slovakia actually fell.

My point in this post is to show that indirectly, in a way, this is also the fault of the EU Bureaucracy in Brussels. I’m a little upset because some things could have been done better and more effectively by more simple reasoning. Also I think that the fall of this government is not good news for Slovakia at all.

Although the foreign media did indeed mention the inner politics in Slovakia and how one of the government coalition parties (SaS) is refusing to approve the bailout fund because Slovakia is relatively poor, none really mentioned the fact that Slovakia will have to contribute the 2nd biggest portion of its GDP. In short it will have to carry the biggest burden. This the whole time is the reason why the vote is being delayed in the first place.

This isn’t about money but about proportion. Even though Slovakia will have to contribute only something about 2 % and probably the smallest amount of money to the EFSF, it will have to contribute the biggest portion of our GDP.

I’m not even going to get into the fact that Slovakia worked very hard to be able to accept the Euro currency and we still have the lowest average wage in all of the Eurozone and we would thus have to be more in debt just to save a country like Greece that did irresponsible fiscal and economic policies.

The other fact I’m not going to get into is that this whole plan of bailing out Greece multiple times cannot possibly work and Greece will default eventually. Two of the recent plans to save Greece are practically organized defaults. So Slovaks would actually be contributing our money to saving something that would eventually fail anyway.

I’m surprised that no one really reported that Slovakia (the poorest Eurozone member) would contribute the most as percentage of the GDP. This does not make sense to me.

Why should the poorest of the countries carry the biggest burden?

Back in 2009 Ireland was given an exception in the EU when it wanted it first failed to adopt the Lisbon treaty. Many countries in the EU such as UK and Sweden also have exceptions of various kinds.

Why didn’t Europe even consider doing some sort of a compromise with Slovakia? Seriously? I’m not a euro-skeptic nor do I want my country or my government to seem to be euro-skeptic, but there could have been ways to do an efficient compromise.

I want Slovakia to contribute to the Euro Bailout Fund because, again, I’m not a euro-skeptic. But the portion of Slovakia’s GDP in contributing could have been smaller. I know that mathematically and economically it would have been inefficient to have every single of the 17 countries to contribute the same percentage of GDP.

But, again, why should the poorest ones pay the biggest portion of the GDP and thus carry the biggest burden? Estonia is probably just as poor (or just as rich, depending on your point of view) as Slovakia. The average wage in Estonia is 786 Euros, in Slovakia it is 762. Yet it contributes the same part of the GDP as Slovakia does. Approximately 13%. Slovakia will have to contribute 11%. Economies like France and Germany where the average wage is over 2000 Euros would only contribute 8% of their GDP.

I’m not against the bail-out completely. I think that countries like Portugal, Spain, Italy  and Ireland will be fine eventually and helping some of them with the bailout mechanism would actually work. But even with that in mind I think, Slovakia and other poorer Eurozone countries (Estonia, Slovenia or Malta) would have deserved to contribute less.

Neither am I saying that the other 16 countries in the Eurozone that adopted the EFSF are stupid. I’m not trying to make a point that only Slovakia should have been offered a compromise or a specific deal. Every country which had problems with the EFSF should have been offered an alternative.

Here is my point: The EU could have tried to understand more in detail why Slovakia is so stubborn to adopt the bailout fund. It could have tried to give Slovakia a compromise or a kind of an exception. It did it for Ireland and other countries.

The answer to rescuing economies in debt is not by indebting the other poor and less competitive economies which are doing still pretty good.

A very reasonable, effective and simple plan would have made us guarantee  a smaller portion of our GDP to the EFSF and this sum could have been shared by bigger economies for whom it would have been only a fraction of their GDP. There, this simple.

Slovakia probably would have accepted it right away.

But no such incentive ever came from Brussels. (If it came and I actually missed it, then please send me links, because I don’t want to seem like a demagogue).

On the other hand, why didn’t our government ask for some concessions from the EU or the other Eurozone Countries? Here I do criticise Ms. Radičová for not asking for anything from the EU. (If she did then I actually missed it.)

I definitely don’t think that the SaS party back in Slovakia did the right thing. It is the direct cause of the government’s fall, but it is actually right. Slovakia shouldn’t carry the bigget burden to save an irresponsible Greece when it has its own problems currently in health care with insufficient doctors.

Now because of the problems with voting for or not of the EFSF Slovakia’s government fell. Not just any government. A good “pro-market oriented” government fell. First of all I think our (now ex-) Prime Minister Iveta Radičová did a mistake in threatening to resign and in joining this vote with the vote of confidence in the parliament.

It is clear that Mr. Fico (the leader of the main opposition party) was working his own agenda and interests and was thus clearly not euro-oriented. He explicitly said that he would not vote for the EFSF to let the current government fall but would vote for it later and ask for early elections.

Anyone from Brussels who had looked at the issue just  a little bit closer would have immediately realized it.

Why didn’t Mr. Barroso, head of the European Commission send any messages to Mr. Fico? Why did he let a government fail? He only pressured the Slovak government to adopt the EFSF. Only the European Socialists Party were pressuring Mr. Fico to accept the European Bailout Fund.

Had Mr. Fico been pressured more, the EFSF would have passed and Slovakia would still have a working progressive government. Again, just that simple.

If Mr. Fico really is a pro-european politician then he would have voted for the bailout fund anyway and would not have just been attempting to make a government fail.  Now of course he is going to vote for it so that he does not seem anti-european or euro-skeptic.  Can’t anyone in Brussels or in the EU Commission see what he is doing? It was pretty obvious.

I do not want to seem anti-Fico here or be too partisan, because Ms. Radičova’s party back in the day in 2008 did something similar when  it was blocking the passage of the Lisbon Treaty. That wasn’t right either.

I do think that Slovakia could just got on with the EFSF, and the life would go on, but I think it is a mistake still.

By not trying to give any alternative to Slovakia, the EU actually, although, indirectly caused a government to fall.

My biggest fear is that Mr. Fico’s new government (he will most likely win the new early elections) will be as bad as it was in the years of 2006-2010. I hope I’m wrong and again everyone deserves another chance. I fear of renewed non-transparency in government, renewed excessive public spending and nationalistic rhetoric.

Finally, I also think that the way everyone in the EU expected Slovakia to vote was close to ridiculous. They actually expect Slovakia to vote again and again until they say yes? So in short all the “NO”-s don’t count but one “YES” will? This is absurd and I dare say “close to undemocratic”. I am sure that the coalition parties in Slovakia met and tried to reach an agreement or a compromise before each vote.

But how can the EU just expect a national parliament to change its mind if it doesn’t offer anything in exchange?

If the EU is to be a success and I wish for it to be a great one, it cannot just ignore small countries’ realities. Nor am I saying that no country should ever make sacrifices but the ones that are being asked from Slovakia are economically too big and yet easily manageable. In a way I think that this is also a failure of common sense.

The EU Bureaucracy should also consider the dangers of falling governments and should try to study the country’s needs and troubles more in detail. The EU should also watch out for populists who are just viewing their own interests.

Again, I’m not anti-european nor a euro-skeptic. I’m not against the EFSF as a whole either. I’m just upset about how things in the EU are being done and my home country has to suffer from it.

In summary these are the issues I have a problem with:

  • The EU did not offer any alternative or concession or compromise to Slovakia and it should have
  • Nobody from the EU really pressured the other Slovak parties to accept the EFSF
  • The poorest and least competitive economies have to carry the biggest burden which goes totally against the common sense

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