I don’t know about you, but I have been trying to grasp what exactly is going on around the eurozone crisis. Having watched numerous news items, question time and ‘this week’ (I love Thursdays) I have got this far. Please do correct, annotate or add to this. Together we may understand what is going on.
Most governments have been borrowing money because they spend more than they make from taxes. Tax revenue and public spending defines ‘fiscal policy’ (basically if a country lives within its means). Countries like Greece and Italy are seemingly struggling to show how they will eventually pay back their debts (by showing future growth in their economies that would fund the debt). This means that any further loans they take are seen as risky, meaning higher interest rates are placed upon the terms (they pay more back per euro spent).
With high interest rates, high debt, little sign of growth and a bleak future; the financial markets freak out too. From a business perspective would you lend, invest or buy from someone who is struggling to stay afloat? The markets say no. This further reduces trading with that country, and the whole thing would fall down. This would be a country ‘defaulting’ or becoming bankrupt. Not a good place to be.
So, to give more confidence in working with these countries, allowing them to survive and grow; the other EU countries can help. This is partly for selfish reasons and the benefits of the union I shall return to. For now, we need to know that France and Germany have the reserves and ability to underwrite any loans a country may default on. This means should a bank lend to Greece and it defaults, France/Germany would pay that money back.
However, if countries like Germany and France do such a thing, they need to be confident the other countries are doing all they can do avoid the default. Last night, discussions were occurring around a ‘fiscal union’. This would impose measures on all who sign up to converge their economic fiscal policy around tax and spending. If everyone keeps their borrowing down, improves their growth, all would be well.
As a result of this fiscal union, the European Central Bank (ECB) could print money (known as quantitative easing). The additional money is given to big businesses, such as banks, to disseminate out via loans to smaller businesses. This enables companies to have the money they require to weather the current storm, to survive, to invest, to grow, to increase output and employ more people.
From a fiscal perspective, the theory is spending would eventually go down from increased employment (lower welfare bills), tax revenues would increase from corporation tax, income tax and NI contributions of increased economic output, whilst VAT revenue would go up following increased consumer confidence and spending. In turn helping industries such as retail to pick up, and so the cycle would continue.
The counter argument is that if you raise taxes and reduce public spending, the economy has no fuel to grow and create jobs. Keynes would say spend your way out of a recession. In spending (borrowing) more now, you have the platform to grow an economy to become self-sufficient and pay down the debts easier.
The problem of this is the ECB has said it wouldn’t print the money anyway and in the UK we tried this and it didn’t work either. Also in the UK because we are separate to the eurozone, we do not need to sign up to the potential fiscal union (as we have our own central bank who can and did print money as commented on).
This leads us to why Cameron is having issues. So many general indicators point towards us not needing the EU (in terms of the points made so far) and many of his own party would love us to pull out altogether too. Cameron today said he wouldn’t agree to the fiscal union on the basis of the transaction tax affecting the ‘City of London’. This is an area I am less sure of, but its a fundamental and drastic change in our relationship with Europe.
If our part within the EU diminishes, we would lose all of the trading benefits internally (such as the higher tariffs we would have imposed on European goods) and externally we would no longer have the union ‘clout’, the comparative advantages of co-trading, or the bargaining power with other trading zones (North America Free Trade Area, China and so forth). A step before this is simply we would have no influence on the decisions made EU wide. Decisions that would still effect us drastically.
Clearly any drastic changes to the original EU treaty would have to lead to a referendum (the UK public having the facts presented to them before deciding what is best). The question is should we stay or should we go?
Moving forward, I feel we benefit vastly from trading with Europe, working with our fellow continental friends in world trade and we should look out for our neighbours; as one would hope they would for us. Debatable, but that’s how the world should be in my opinion.
Equally, we shouldn’t sign up to anything crazy such as the euro at present.
If we can play our role, support the struggling countries (even financially to a lesser extent, if necessary) we would see far longer term benefits in terms of the eurozone staying together and recovering, before thriving again. I love the combination and diversity of different cultures, products, services and value being harnessed together to support each other.
The big lesson for me is that everyone has been spending too much and borrowing too much (individuals, business and governments). Once we all realise how to live within the worlds limited resources and find happiness from non-monetary and materialistic sentiments, our political economy issues would subside.
Well, what do I know. I clearly will have missed out other points and by no means have the answers, but thats my understanding and views – I’m now off for a cuppa!