The Debt Crisis - Essay Example

The Euro The debt crisis that has rocked a significant province of Europe has resulted in the intervention from economists, traders, politicians, and investors regarding the need to rescue the euro from potential collapse. With the economic and political integration in Europe, the use of single currency means that a slight economic shock in one of the member countries affects the economic operations in other member states. Indeed, this year, 2012, is the year to either make or break the crisis that has seen economic slowdown in some European states and has made different sovereign countries pass the blame to other members. For instance, Germany has been accused to have benefited from the economic integration at the expense of other states like Greece and Italy, which have experienced enormous economic turbulence (Arestis 23). Many parties have argued that the absence of action by the euro leaders could worsen the euro crisis. There are, however, diverse arguments on whether the euro should be maintained or not. It is imperative to note that the genesis of the euro problem is from both the government and the private sector. In Greece, for instance, the government mismanaged their finances despite the large amount of borrowings that it had made (Lynn 123). The loans were thus misappropriated instead of being placed in productive areas. The debt problem in Ireland, on the other hand, arises from the private sector – for instance, from the banks, which continue to lend to unproductive investments. Those who were granted loans from the financial institutions were, therefore, unable to finance their loans, and this led to a financial contagion within the sector. From both cases, it is crystal clear that the contribution of the financial sector to preventing currencies from collapsing or to controlling the economic performance is enormous. The first school of thought contends that failure to take decisive actions could result into the spreading of the problem to other countries, which are still considered healthy. Consequently, the interest rates on government could rise, leading to an increase in the level of government debt. This could reach a point in which some countries could stop using the euro, thus aggravating the crisis. It, therefore, means that productive intervention and informed decisions made by the member countries would make the euro regain and flourish while failure to take appropriate actions could impair the existence of the euro (Soros 168). In addition, European Union should advocate for a reduction in budget deficit among the member unions to eclipse the euro from further depreciation. This move will ensure that the debt level is kept as low as possible. Reducing the budget deficit implies that countries will not take more loans to meet their financial obligations and thus will save the euro from disappearing (Arestis 36). Another strategy that can be adopted is the use of the “European Central Bank canon” to ensure that the debts in each of the member countries are shared among all the other member nations and that they do not resort to bailouts and budget cuts. This strategy aims at substituting the national bonds with a euro bond. In this case, countries which are financially weak will have a lower spread in which they will be made to repay their loans in extended periods of time while the nations with stronger financial background will enjoy a premium when borrowing (Soros 181). This measure will see ECB repay the intoxicated debt and reduce the burden of the most affected countries. It is, however, expected that countries like Germany and France will definitely oppose such a move, as it will amount to committing a political suicide. Countries which are financially strong will view this as interference and claim that such an action does not reduce inflation or solve the debt crisis. They would further argue that this could lead to complacency in the member states facing higher financial crisis. Merkel will instead demand that there be fiscal discipline among the member states to ensure that they control their expenditures and refrain from over-expenditure to reduce the debt crisis. On the other hand, any action that would make any of the larger states to withdraw from using the euro could automatically result in the disappearance of the currency. This is because such withdrawal will send a shock to the currency and cause shock in the financial market. It would also make the euro weaker, and the investors will lose confidence in the currency. Moreover, such attempts would also make the foreign debts increase since the conversion of the euro to other major currency would make the total debt repayment higher. Germany and other states whose financial capability is strong should continue to cooperate with the other member states and to try helping them get out of the crisis (Glazer 105). Failure to take such an initiative will make the euro weaker and this could adversely affect their economic operation. Furthermore, saving the banks and other financial institutions from the sovereign debts is fundamental in fixing the euro crisis. Since a collapse in a banking institution sends a shock and causes financial contagion across the financial sector, failure to shield the banks from collapse would further weaken the euro and make investors prefer other currencies, which could endanger the existence of the euro (Overtveldt 165). ECB should instead formulate policies that would see the commercial banks operate within the policies and see a way of creating money to help pay the debt facing the commercial banks. Besides, failure to salvage the commercial banks from collapse would result into huge losses of the euro and thus promote the deterioration of the currency (Glazer 113). Banks with high euro reserves would suffer additional losses and experience a high default rate of their sovereign loans, and this will cause the euro to disappear. Moreover, economic cooperation should be promoted at this time to prevent the euro from collapse. Through economic cooperation, EU member states will be in a position to make their fiscal policies in a manner that strengthen the euro and reduce the amount of debt. Fiscal cooperation is further necessary to ensure cooperation among the countries in finding the solutions to the euro crisis (Mercier 79). This would reduce the period of financial crisis as compared to individual actions of any state. The argument on the need to come up with solutions to the euro crisis is not only limited to economic policies but also depends largely on the political cooperation and solutions. There is a need for the leaders of the different countries to read from the same script and avoid any squabbles that might cause panic. Political bickering or disagreements have the potential of repelling investors interested in putting their wealth in the euro zone. Furthermore, political instability among the member states will result into investment flights that will result in depreciation of the euro (Overtveldt 174). Continued depreciation of the euro could make investors prefer other currencies, such as the dollar or pound sterling. This action would thus result into the disappearance of the euro. Increment for exports from the euro zone may help regain the health of the euro. Countries with better financial health, like Germany and France, need to increase the amount of export they make to other countries outside the euro zone as a means of helping the euro to be valued. Increase of exports causes an increase in the demand for the euro, which will further increase its value against the other currencies. Other euro member states will also have to reduce the level of imports in order to have the euro regain from losses. The EU indeed wants a stronger euro rather than a weak euro if it has to come out of the tribulations that have marred the region. A strong euro is essential in restoring the confidence of the investors in the currency and making it preferred among the other currencies. A strong euro further makes it possible to increase the exports from the region and to make the imports cheaper and more affordable. With a strong euro, it will be cheaper to finance foreign debts and shield the currency from further depreciation. European institutions like parliament and ECB have a crucial role to play in the mitigation of the impact of this crisis and in the restoration of the strength of the currency. Parliament of each of the countries should formulate legislations and policies that focus on salvaging the euro rather than those that result in further depreciation of the currency (Mercier 53). The institutions must control the fiscal policies in the region by having a limit on the debt level and by designing the manner in which the debts shall be repaid. Moreover, it is the role of the institutions to enforce discipline in the region and to monitor how expenditures are incurred and in what areas. In conclusion, countries as Qatar should learn from the euro crisis and ensure that it does not repeat the same mistakes. Qatar must learn to keep the debt level as low as possible and institute legislations that protect the country from political factors that can weaken the currency. The government of Qatar must also ensure that the central bank is in a position to closely monitor the operation of the individual commercial banks so that a strong asset base backs their lending. This will ensure that there is no huge depreciation of their currency and speculations that can pose a great threat to the currency. In summary, failure by countries to come up with ways of managing their debts poses a threat that could make their currencies disappear and lead to deterioration of their economies. Political decisions need to be taken despite the political differences if the euro is to be saved and the extension of the crisis to be avoided. Works Cited Arestis, Philip. The Euro Crisis. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan, 2012. Print. Glazer, Sarah. Future of the Euro will the Eurozone Survive Intact? Washington, D.C.: CQ Press, 2011. Print. Lynn, Matthew. Bust: Greece, the Euro, and the Sovereign Debt Crisis. Hoboken, N.J.: Bloomberg Press, 2011. Print. Mercier, Paul. The Concrete Euro: Implementing Monetary Policy in the Euro Area. Oxford: Oxford University Press, 2011. Print. Overtveldt, Johan van. The End of the Euro: the Uneasy Future of the European Union. Evanston: Ashgate, 2011. Print. Soros, George. Financial Turmoil in Europe and the United States Essays. New York: Public Affairs, 2012. Print. Read More