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May 26, 2010
Euro crisis: Don't discount a global meltdown
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OKAY, so maybe there will not be a meltdown ('Greek crisis unlikely to spark global meltdown'; May 16). But there is still plenty to worry about.
For one thing, Germany is the lead euro country and it may get fed up paying the bills of others. It could drop out. Or the deadbeat nations might be kicked out.
The euro would disintegrate and, in the words of German Chancellor Angela Merkel: 'If the euro fails, then Europe fails.'
To head off such a disaster, the International Monetary Fund (IMF) and central banks have resorted to shock and awe with a $1.4 trillion line of credit for troubled euro nations which are unhappily given the acronym Piigs, which stands for Portugal, Iceland, Ireland, Greece and Spain. Italy may join them soon.
The huge loan allows the indebted countries to borrow at near risk-free rates with no penalty if they do not repay. Germany wants all 16 euro nations to play by the rules and keep their deficits - spending minus taxes - at less than 3 per cent of gross domestic product (GDP). It's a reasonable rule, but following it could drive the weak nations back to recession.
Should the Piigs act responsibly and spend less? Or should they stimulate their economies and spend more? These are opposite goals and, incredibly, no one knows which is correct.
The biggest question is whether the euro is fundamentally flawed? How can exchange rates among 16 different countries remain fixed forever? It has never happened in history but this is exactly what the euro requires.
The stakes are high. Europe is the world's second largest economy after the United States, and a big source of export demand for the world, including Singapore. If Europe drags the world into another recession, it will be harder to fix than in 2008.
Then, governments bailed out companies and banks. This time, governments would have to bail out other governments. It is more risky since sovereign nations provide no collateral. There is nothing to seize in the event of default.
Worse still, rich countries are in no position to bail out anyone, including themselves. Many have debts approaching 100 per cent of GDP and cannot borrow more without jeopardising their credit ratings.
Come to think of it, a global meltdown is not so far-fetched.
Larry Haverkamp
Euro crisis: Don't discount a global meltdown
<!-- by line --><!-- end by line -->
<!-- end left side bar --><!-- story content : start -->
OKAY, so maybe there will not be a meltdown ('Greek crisis unlikely to spark global meltdown'; May 16). But there is still plenty to worry about.
For one thing, Germany is the lead euro country and it may get fed up paying the bills of others. It could drop out. Or the deadbeat nations might be kicked out.
The euro would disintegrate and, in the words of German Chancellor Angela Merkel: 'If the euro fails, then Europe fails.'
To head off such a disaster, the International Monetary Fund (IMF) and central banks have resorted to shock and awe with a $1.4 trillion line of credit for troubled euro nations which are unhappily given the acronym Piigs, which stands for Portugal, Iceland, Ireland, Greece and Spain. Italy may join them soon.
The huge loan allows the indebted countries to borrow at near risk-free rates with no penalty if they do not repay. Germany wants all 16 euro nations to play by the rules and keep their deficits - spending minus taxes - at less than 3 per cent of gross domestic product (GDP). It's a reasonable rule, but following it could drive the weak nations back to recession.
Should the Piigs act responsibly and spend less? Or should they stimulate their economies and spend more? These are opposite goals and, incredibly, no one knows which is correct.
The biggest question is whether the euro is fundamentally flawed? How can exchange rates among 16 different countries remain fixed forever? It has never happened in history but this is exactly what the euro requires.
The stakes are high. Europe is the world's second largest economy after the United States, and a big source of export demand for the world, including Singapore. If Europe drags the world into another recession, it will be harder to fix than in 2008.
Then, governments bailed out companies and banks. This time, governments would have to bail out other governments. It is more risky since sovereign nations provide no collateral. There is nothing to seize in the event of default.
Worse still, rich countries are in no position to bail out anyone, including themselves. Many have debts approaching 100 per cent of GDP and cannot borrow more without jeopardising their credit ratings.
Come to think of it, a global meltdown is not so far-fetched.
Larry Haverkamp
