Eurozone Crisis Outlay
23 February, 2012
Eurozone Crisis Outlay

Neglecting fundamental macro-economic limits pushed Euro-countries to the crisis, Georgian Investment Group believes and now only restoration of old rules cannot help them to bottom out the economic swamp. Expenses must be curtailed too.

 

The International Monetary Fund (IMF) expects the second tide of economic recession in the Euro zone although there are some optimistic prognoses too. French minister of finances thinks that the economic nightmare going on for four months already is over and the EU will bottom out the

crisis much sooner than forecasted before. Georgian Investment Group (GIG), having researched the issue of the EU crisis, arrived at the conclusion that the core reason the EU plunged in crisis is overlooking the well-established macro-economic parameters.

“Today everybody looks at the EU with alarm and hope assuming that if the underway crisis is not handled and cured, the global economic crisis will get much deeper and more dire,” Davit Aslanishvili, author of the research, says accentuating that the fault is not only with Greece or any other country separately; all EU members are responsible for violating the rules of game settled from the very onset of the EU.

Lately 25 states out of the 27 EU members signed an agreement on stronger fiscal discipline [German demand] restricting new debt limits: the volume of the country’s debt can be enhanced only by 0.5% annually in regard with the economic growth of the country that year. Meantime this 0.5% should not exceed 3% of cumulative current deficit. These stricter norms are supposed to prevent new accumulation of new debts and a new crisis.

However, Aslanishvili assures that the same limits were built in the Maastricht agreement in 1997 that gave birth to Euro ultimately. However these principles were violated. Italy was the first breaker as it never observed the 3% limit. Germany that initiated stricter rules nowadays was the runner up [breaker] amazingly enough.  The bad sample infected France gradually. The only country having always been loyal to the Maastricht standards was Spain till 2008 crisis and it has the smallest volume of state debt [compared with the economic size]  among these four countries.

Greece never observed the 3% benchmark however but practiced a consummate scheme of data manipulation and was the sample country till the manipulation was revealed ultimately. According to data of 2010, internal debt of EU countries breaks down as following:   Germany-77%, France- 97%, Italy 129% and Spain-72%.   Based on the statistics Spain must be flourishing and Germany, France and Italy be the most distressed, but the reality suggest different layout.

The problem to Spain is its private sector. Banks and construction industry as well as other economic sectors borrowed money and invested at uncontrolled liberal markets abroad thus inflating the overall state debt enormously in spite of the fact that the state part was insignificant in it. On the other hand Italy, Spain and partially France having borrowed billions abroad increased import to staggering amount and filled the trade deficit by debt of the both state and private sector. Been oriented on export Germany took advantage of the situation increasing export in all direction including the Southern European countries and enjoying money surplus that was successfully lent to the similar questioned countries.

On the other hand in years of economic prosperity [1999-2007] salaries in Italy, Spain, France and Greece increased along with the debt so as they reached German salary levels where trade unions managed to reach an agreement on stable salaries. Now against the background of crisis the questioned countries except Germany fell in unfavorable situation: they cannot borrow cheap money any more that poses all countries in uncompetitive condition compared to Germany and the product produced in such countries lag behind price and quality of German product.  Social welfare and salaries of the workforce of the crisis-affected countries also dwindled enhancing gap with Germany.

And if the ailing countries do not decrease expenses setting deficit limits at 3% alone will not recover the situation, Aslanishvili believes. This unpopular step will jack the already high unemployment figure up and the affected countries will plunge deeper in recession and protestation tides will be permanently upsurge. But if expenses are not curtailed Aslanishvili predicts a guaranteed financial collapse for the crisis-affected Southern European countries after which they are scarcely supposed to remain within the Euro zone.

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