Re­vis­it­ing the debt cri­sis in Europe

The Pak Banker - - OPINION - Ku­nal Singh

SOON af­ter the fi­nan­cial cri­sis of 2008 in the US where sev­eral large in­sti­tu­tions had to be bailed out, Europe was struck with a debt cri­sis where coun­tries had to be res­cued. The sov­er­eign debt cri­sis in Europe was not easy to nav­i­gate and on sev­eral oc­ca­sions it threat­ened the very ex­is­tence of the sin­gle cur­rency union, push­ing the en­tire global fi­nan­cial sys­tem to the brink. Al­though the prob­lem has not been fully re­solved, for now an­other fi­nan­cial cri­sis has been avoided. But that's not enough. The Euro­pean Court of Au­di­tors, in a re­port re­leased re­cently, raised sev­eral ques­tions on the way the Euro­pean Com­mis­sion han­dled the cri­sis. As­sis­tance to trou­bled coun­tries was man­aged by the Euro­pean Com­mis­sion, In­ter­na­tional Mon­e­tary Fund and the Euro­pean Cen­tral Bank. In their re­port, the au­di­tors have noted that the com­mis­sion was un­pre­pared for the cri­sis. It not only un­der­es­ti­mated the fis­cal im­bal­ance but also did not prop­erly eval­u­ate the con­se­quences of large for­eign debt in­flows in the run-up to the cri­sis. The re­port also high­lights that coun­tries seek­ing as­sis­tance were not treated in the same way and con­di­tions were man­aged dif­fer­ently.

"The risk of treat­ing dif­fer­ent coun­tries in­con­sis­tently or de­mand­ing un­nec­es­sary re­forms re­mains a chal­lenge to the process of pro­gramme man­age­ment," said the re­port. It has also made sev­eral rec­om­men­da­tions, in­clud­ing rapid mo­bi­liza­tion of hu­man re­sources, both from in­side and out­side the com­mis­sion, if the need arises. To be sure, the out­come of the adop­tion of the euro as a sin­gle cur­rency has turned out to be aw­fully dif­fer­ent from the idea. The Euro­pean Union adopted the sin­gle cur­rency for deeper eco­nomic in­te­gra­tion and progress. But the ac­cep­tance of the euro re­duced bor­row­ing costs even for rel­a­tively weaker economies, which re­sulted in debt-fu­elled growth for sev­eral years and el­e­vated the level of im­bal­ances. As the credit con­di­tions tight­ened in the af­ter­math of the 2008 fi­nan­cial cri­sis, high deficit and debt be­gan to un­ravel in a num­ber of pe­riph­eral economies. Yields on sov­er­eign debt started ris­ing in coun­tries such as Ire­land, Greece and Spain. The fear was that even if one coun­try de­faults on its debt, the con­ta­gion will rapidly spread and loss of faith in the mar­ket­place would break the euro. But de­spite the im­pend­ing risk, bailouts were not easy to come by, es­pe­cially in the case of Greece, where de­ci­sions have been taken at the very last minute. The con­di­tions im­posed for seek­ing as­sis­tance have also come un­der crit­i­cism. Econ­o­mist Joseph Stiglitz, for in­stance, in a col­umn last year said: "What is needed is not struc­tural re­form within Greece and Spain so much as struc­tural re­form of the euro zone's de­sign and a fun­da­men­tal re­think­ing of the pol­icy frame­works that have re­sulted in the mon­e­tary union's spec­tac­u­larly bad per­for­mance." The au­di­tors have not re­viewed the Greek bailout and will is­sue a sep­a­rate re­port on it at a later date.

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