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Showing posts with label José Manuel Barroso. Show all posts
Showing posts with label José Manuel Barroso. Show all posts

Monday 21 May 2012

Debt crisis in Europe will affect rest of the world

The economic crisis in Europe is deepening and may get worse, with worrisome effects on the rest of the world.

Eurozone crisis: high-stakes gamble as David Cameron warns Greek voters.
David Cameron and European Commission president José Manuel Barroso talk before a session at the Nato summit in Chicago. Photograph: Pablo Martinez Monsivais/AP

THE economic situation in Europe has worsened considerably in the past week, giving rise to a very worrisome situation.

The ramifications of a full-blown crisis are serious not only for Europe but also the rest of the world.

The recent Greek elections saw the citizens proclaiming their anger towards the austerity policies tied to the European-IMF bail-out package, by repudiating the two major parties and giving the small anti-austerity Syriza party second place.

The elections came in the midst of a greatly deteriorating condition. Greece has 22% unemployment, 50% youth unemployment, GNP is falling steeply, and public debt will remain high at 160% of GDP next year despite the recent bailout and debt-restructuring measures.

The leader of Syriza, Alexis Tsipras, who swept to the forefront of Greek politics on the wind of protest against the austerity measures imposed by creditors, wants to re-negotiate the terms of the bailout.

He thinks his insistence on this will eventually force the creditors to change the terms, with Greece remaining in the Eurozone.

But many analysts think that the response to this demand from the EU and IMF would be to stop further loans and force Greece to exit the Euro. In a second election in mid-June, Syriza is expected to do even better and a messy Greek loan default and Euro exit are now seen as more than just possible.

In a Eurozone exit, Greece would re-introduce a local currency, and after Greeks change from their Euros, a depreciation of the new currency is expected to happen.

News report indicate that some capital flight from Greece is already taking place, as Greeks fear that their present Euro-denominated assets would lose value after conversion to the local currency.

Meanwhile, Spain was last week desperately trying to avoid a run on banks after the government was forced to partly nationalise Bankia, the second largest bank, followed by rumours of such a run.

The value of bad loans held by the banking sector rose one third in the past year to 148 billion Euro and Moody’s downgraded the credit rating of many Spanish banks.

The Spanish finance minister Luis de Guindos said the battle for the Euro is going to be waged in Spain, implying his country is now in front in trying to prevent the Greek crisis from infecting other European countries and bringing down the Euro.

The spreading crisis throws into doubt the policies in most European countries that have in recent years focused on drastically cutting government spending to reduce the budget deficit in an attempt to pacify investors and enable a continued flow of loans.

This reversed the coordinated policy of fiscal reflation that the G20 leaders agreed on in 2009 to counter the global crisis. It contributed to the rapid recovery.

Since then economists and politicians alike have been debating the merits of Keynesian reflationary policies versus a resumption of IMF-type fiscal austerity.

The movement towards recession in Europe as a whole and deep falls in GNP in bail-out countries like Greece has boosted the arguments of the Keynesians.

But key leaders such as Angela Merkel of Germany and David Cameron of Britain are still convinced of the need to stick to austerity.

The victory of the new French President Francois Hollande and the stunning polls performance of the Syriza party in Greece indicate that the public wind has shifted radically against austerity, and that a change may be on the cards.

The stopping of loans to Greece would lead to an economic collapse, with government debt default, bank runs, re-denomination of local contracts to local currency and default on external contracts denominated in euro, in a scenario painted by Wolf.

A Greek exit could trigger bank runs and capital flight in Portugal, Ireland, Italy and Spain and beyond, causing collapse in asset prices and large GNP falls.



A decisive European response is needed, such as the European Central Bank providing unlimited loans to replace money taken out in bank runs, capping of interest rates on sovereign debt, Eurobonds and abandoning austerity-centred policies.

But if these policies are not taken, the Eurozone may disintegrate, with one study suggesting GNP falls on 7% to 13% in various countries, and if a full Eurozone break up takes place there could be a freeze in the financial system, a collapse in spending and trade, many lawsuits and Europe facing a situation of political limbo.

The impact on the world would be worse than the Lehman collapse. Though the implication is that this should not be allowed, a Greek exit would greatly increase the likelihood of these dangers.

If Greece leaves, the Eurozone will have to change fundamentally but if that is impossible, large crises will be repeated in a nightmare.

There would have to be a choice between a stronger union of European countries (which many do not like) or endless crises in future, or a break up now. No good choices exist, concludes Wolf.

The scenarios and predictions detailed above in the Wolf article are pessimistic, but may also be realistic not only because of the current economic situation, but also the apparent lack of conditions for a political solution.

Watching from the sidelines, with no ability to influence developments, many in the developing countries are disturbed by the turn of events. It will likely lead to a weakening of the global economy at best and a full blown crisis at worst, with the developing countries at the receiving end in terms of trade downturn, financial reverberations, and declining incomes and jobs.

It is apparent, once again, that a global forum should exist where all countries can discuss developments in the global economy and contribute their views on what needs to be done.

In the inter-connected world, policies and events in one part (especially in the core countries) affect all others.
 
 Global Trends By MARTIN KHOR

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Saturday 18 February 2012

China's Helping Hand for Europe

Made In China by CHOW HOW BAN

China has promised to help the EU deal with its debt problems through the stability facilities, but it should not be misread as a pledge to buy more European government bonds.

Sino-EU ties: Chinese vice-premier Li Keqiang (right) talking to Barroso (left) and Van Rompuy during their meeting at the Great Hall of the People in Beijing on Wednesday. — AFP

EUROPE has played a big role in China’s economic successes throughout the past three decades. That was the main tone the European Union (EU) brought to Beijing for the China-EU Summit on Tuesday.

And China’s response was that it would offer the EU more help to overcome the eurozone sovereign debt crisis – an assurance from the economic powerhouse that the EU pretty much hoped for.

The friendly exchanges between the Chinese and EU leaders laid the foundation for the success of the summit. Sino-EU trade relations have continued to thrive amid the debt crisis in Europe, with trade volume surpassing €460bil (RM1.83 trillion) last year. Europe is China’s biggest export destination.



 “Over the past decades, China has become an even greater force in regional and global affairs and its economic and social development has been immense,” European Commission president Jose Manuel Barroso said after the summit attended by Chinese Premier Wen Jiabao, his Cabinet members and European Council president Herman Van Rompuy.

“Europe can only rejoice at this success. I believe that Europe can legitimately claim some parts of the success because China’s economy has greatly benefited from Europe’s open policies and open markets.

“As Europe and China are inter-connected and inter-dependent, we should work even more closely on different fronts to deepen our relations.”

He assured the Chinese leaders that the EU was doing what it takes to restore the confidence of investors and international stakeholders and its partners amid the crisis.

Wen said China was ready to help Europe deal with its debt problems but the EU would have to take its own initiatives as well as address the issues.

“China’s willingness to support the EU in dealing with its debt crisis is sincere and resolute. China will continue to join hands with the EU for mutual benefit despite the fast-changing global economic situation,” he said.

Last week, Wen had told German Chancellor Angela Merkel at a meeting during her official visit to China that China would consider getting more involved in solving the debt woes in Europe, especially through the European Stability Mechanism and European Financial Stability Facility.

“Resolving the debt crisis relies fundamentally on the efforts made by the EU itself.

“We expect the debt-stricken nations, according to their own situations, to strengthen fiscal consolidation, reduce their deficits and lower their debt risks,” he said.

However, analysts said that Wen’s promise to help the EU deal with its debt problems through the stability facilities should not be misread as China’s intention to buy more European government bonds.

Speaking at a forum on Monday, Lou Jiwei, chairman of China Investment Corporation (CIC), a sovereign wealth fund tasked with managing China’s foreign exchange reserves of US$3.2 trillion (RM9.7 trillion), said Merkel expressed her hope that long-term investors like CIC would buy German, French, Italian and Spanish debts.

“Some people think that there have been some positive improvements in the eurozone debt crisis in the short-term as the EU came up with some fiscal policies. But they have not got to the root of the problem and we should be able to see the effects in June or July,” he said.

He said it would be more likely for investors to invest in infrastructure and industrial projects, which would help in the economic recovery of the European nations.

In its editorial, People’s Daily said the eurozone debt crisis stemmed from the zone’s monetary and financial systems and its flaws in economic governance and policy-making mechanism.

“The unification of the euro currency has failed to promote fiscal unification because the EU member states are reluctant to give up their control over tax revenues,” it said.

“EU politicians may have the determination to safeguard the eurozone but they do not have fiscal resources which can be channelled in a unified way to troubled nations and do not have a proper mechanism to solve the debt issue. This has resulted in a worsening of the crisis.”

During its short trip to China, besides having deeper exchanges of views on EU-China relations with the Chinese leaders, the EU delegation was also on a mission to convince Chinese scholars and investors that Europe was on the right track to come through the crisis.

“Incomplete governance and surveillance in the euro area have caused imbalances and divergences in competitiveness. The sovereign debt crisis has been a wake-up call,” Barroso said.

“But the EU has acted decisively to tackle the crisis, strengthen economic governance, stabilise public finances and implement structural reforms such as the European Stability Mechanism and European Financial Stability Facility with a combined fund of €500bil (RM1.99 trillion) as financial aid for some member states.

“Other measures aimed at creating more jobs and ensuring sustainable growth include the EU2020 Strategy, a blueprint which will get the economy back on track over the next eight years with education, research and innovation as key drivers.

“In my view, what Europe has been doing, particularly during the most recent period, constitutes a basis for investors to regain confidence in Europe.”