Analysis

The Euro is Taking a Beating

European nations, in general, are small in size. The Bihar state of India, to illustrate a point, is 1.3 times the combined area of Belgium and the Netherlands. A traveler can crisscross some nations by a car or train in a short period of time.

A visitor once carried Italian liras for Italy, French francs for France, German marks for Germany, Dutch guilders for the Netherlands, etc. A businessperson had to keep a multitude of European currencies in order to conduct business in Europe. However, more than a decade ago, a change occurred. Economists devised a common currency, known as the Euro, to simplify the buying and selling of goods and services in Europe and to eliminate the cost of converting currencies and the hassle of carrying them.

Many nations adopted the Euro currency, signed the Maastricht Treaty, and joined the European Union (EU). The treaty mandates that each EU member nation keep its budget deficit less than three percent of the GDP (gross domestic product), debt to GDP ratio less than sixty percent, inflation low, and interest rates close to the EU average. However, some EU nations’ economic performance is far from the treaty’s set target. Greece, Italy, Portugal, and Spain are all in financial trouble. They have high debt, high unemployment, and high budget deficit.

The debt-ridden Greece, for example, has a public debt to GDP ratio of nearly 165 percent, an unemployment rate over 16 percent, and a budget shortfall of more than 30 billion Euros. She is asking the Euro zone’s main financiers, France and Germany, to give her additional loans and restructure her debt. In return for this help, the financiers are asking Athens to cut the government spending, reduce the size of the public sector, decrease the government work force, and increase the income tax collection. The Greek government is trying hard to implement these austerity measures, but the labor unions and general public are not cooperating. Doubting if Athens would soon emerge from this economic crisis, financial markets around the world expect the value of Euro currency to fluctuate.

The EU nations of Germany and Greece are different. As a percentage of GDP, the Greek government spends way more than its income, whereas the German government spends close to what it collects. Ten percent of Greece’s labor force work for the government, whereas in Germany, the rate is four and one half percent. Greece’s taxes are so are high that tax evasion is rampant, while Germany enjoys low taxes. Corruption in Greece is widespread, whereas Germany has none. In short, Germany is helping the EU maintain the value of the Euro, whereas Greece is doing the opposite. Similar comparisons between productive and unproductive European nations may indicate that a common currency among the nations of varied cultures, each pursuing different economic philosophies and policies, is not practical.

Germans may have to continue to support sluggish European economies in order to protect the Euro. It is like a rich brother helping his unproductive weak siblings.
 

12-Sep-2011

More by :  Vasant G. Gandhi

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