The EU Debt Cri­sis

Enterprise - - Contents -

As op­posed to the per­cep­tions of the Euro­pean econ­omy stand­ing on strong fun­da­men­tals of rapid ex­port growth and sound fi­nan­cial po­si­tions of house­holds and busi­nesses, the year 2008 brought down ma­jor EU and US fi­nan­cial in­sti­tu­tions. The res­cue of Fan­nie Mae and Freddy Mac, the bank­ruptcy of Lehman Broth­ers and con­cerns over the in­sur­ance gi­ant AIG’S down­turn, pan­icked the stock mar­kets. The mar­ket val­u­a­tions of fi­nan­cial in­sti­tu­tions evap­o­rated and in­vestors rushed out for leftover safe in­vest­ment havens. This all hap­pened amid a gen­uine threat of a com­plete fi­nan­cial melt­down of the Euro­pean Union.

The im­me­di­ate con­trol mea­sures came from the cen­tral banks, gov­ern­ments and supra­na­tional au­thor­i­ties in Europe, who acted force­fully to sharply cut pol­icy in­ter­est rates and in­tro­duced or raised guar­an­tees for sav­ings de­posits. Sub­stan­tial fis­cal stim­u­lus was in­jected by the gov­ern­ments. How­ever, now economists spec­u­late about the pos­si­bil­ity of exit as a pol­icy stim­u­lus in the years ahead. This is in ad­di­tion to the chal­lenge of es­tab­lish­ing new EU and global frame­works to re­solve fi­nan­cial crises and man­age the im­mu­nity through sys­temic risk.

Though ex­perts hold the US to be the prox­i­mate cause of the fi­nan­cial cri­sis, Rus­sian Prime Min­is­ter Vi­ladimir Putin dis­re­gards the propo­si­tion. He says: “The US is not a par­a­site for the world econ­omy, but the mo­nop­oly of the US dol­lar is the par­a­site.” This ar­gu­ment is sup­ported by economists who have closely re­viewed the burst­ing of the US prop­erty bub­ble and con­clude that prob­lems in small cor­ners of US fi­nan­cial mar­kets are ca­pa­ble of in­fect­ing the en­tire global bank­ing sys­tem and set­ting off a down­ward spi­ral of fall­ing as­set prices and bank losses.

How­ever, in his ref­er­ence to the re­cov­ery of the EU debt cri­sis, Putin is pos­i­tive on the re­cov­ery po­ten­tial. Ac­cord­ing to him, “Greece is the na­tion in the worst sit­u­a­tion in the Eu­ro­zone, but its eco­nomic vol­ume ac­counts for only 2 per­cent of Europe’s GDP.” On this ba­sis, he fur­ther says: “Some ex­perts be­lieve the scale of fi­nan­cial as­sis­tance in the Euro­pean debt cri­sis is likely to reach 1 to 1.5 tril­lion euros. It is not a small fig­ure, but I be­lieve the EU can af­ford it.”

As Rus­sia and, in par­tic­u­lar Asia, are grow­ing to be strong al­lies of the EU in strength­en­ing the econ­omy, re­gional lead­ers are map­ping out vi­able eco­nomic strate­gies from the debt cri­sis. The for­ma­tion of EU Co­or­di­na­tion has de­vel­oped clear ac­tion phases to­wards a sus­tain­able fu­ture of the EU. A co­or­di­nated ap­proach is nec­es­sary to en­sure an or­derly exit of cri­sis con­trol poli­cies, as de­scribed here,

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