There never seems to be enough of it!! The debt-stricken country of Greece is at a risk of plunging into further crisis. With the prodigal son of the European Union, ‘Greece’ in trouble for a few months now,why has the EU been slow in working out a rescue plan?
Obviously, a lion’s share of the blame goes to the Greek government and its policies influenced by Keynesian theories of development. Policy makers followed a policy based on public spending. They were of the opinion that increased government expenditure will increase consumption and consequently stimulate the economy to stand up on its own feet. However, that came at a huge cost. The fiscal deficit of the Greek government ballooned to astronomical proportions and hit the Euro currency dearly.
However, with such a predicament, the Big Boys of the EU, Germany and France were slow to stand up and act. And I’m not surprised – Germany is the largest economy in the European Union and is pursuing a growth policy which is export driven. Also, it is in direct competition with China to gain export competitiveness. We all know how much the US is clamoring about China being a currency manipulator. With the Chinese Yuan being weak compared to the Euro, Germany was at a disadvantage. Now, with the Euro having depreciated 10% compared to the dollar, it’s time to cash in for German exporters (at least temporarily!). German chancellor Angela Merkel has managed to tread this populist path very skillfully with an eye on elections.
With a German candidate set to replace Jean-Claude Trichet as the head of the European Central Bank, Germany is on firm ground and is set to crack its whip on ‘The Bad Boys’. However, as Germany and Greece share the same currency, the credibility of the Euro cannot be risked in the long run. Due to high savings and relatively low investment, Germany has a huge current account surplus. The advantageous position of Germany and pressure from France and other member countries led Germany to agree on a rescue plan. Angela Merkel has dominantly put a proposition which includes penalties on Greece and severe austerity measures to get its house in order.
Maybe this serves a lesson to Spain, Portugal and Italy which are next in line. They may escape stringent regulations if they manage to take pre-emptive corrective steps.
Nice read Vijay! Now I know how politics, power and policies play a major role in macroeconomics. And we thought that productivity was everything
Comment by Amit Ahlawat — May 2, 2010 @ 7:17 pm |