Africa & Beyond

The weak point in Eurozone weakens its currency

The formation of European Union was an economic breakthrough for Europeans to compete, balance and even counteract the stronger economic blocks especially United States and Asian economies; particularly the euro currency is to stand up to the indomitable US dollar. For some time it appears that everything was working for Eurozone and its euro currency, for the global reserve was increasingly held in euro after dollar. At a point it begins to look like many nations are doing business and keeping reserves in euro as dollar was fluctuating, due to America’s enormous debt and deficit. Since then dollar has rebounded and have been regaining back its potency and clout in the currency world. All is not well in eurozone and with its euro due to the revelation that Greece a member nation is mired in a deficit beyond the stipulated benchmark by the union. The monetary union stipulated that member countries deficit cannot exceed 3% of the GDP.

“Greece’s deficit stands at 12.7% (£259bn), which is over 4 times higher than EU rules, allow and its debt levels are expected to reach 120% of GDP this year if help is not given. Furthermore, if Greece’s debt problems are not tackled, there is a worry that other countries with big deficits, such as Portugal and Spain will become vulnerable. Public spending in Greece had been rising for some time but the tax revenue hadn’t increased to match this. As government spending rose and tax revenues fell, the growing debt was inevitable. What is just as concerning is the cost of servicing this debt. This is costing Greece about 11.6% of GDP and the Greek government has estimated that it will need to borrow ?53bn this year to cover budget shortfalls. Strikes by public-sector workers have also affected the country, as figures show that the unemployment rate has increased to 10.6%.”

Borrowing and living beyond her means is not only unique to Greece but also pertains to Spain, Portugal, Ireland and eastern block nations that run deficits that are inimical to the monetary policy of the eurozone. The problem for Greece is that eurozone is not willing to finance her deficit neither they are willing to allow IMF to lend to Greece. The intervention of IMF with its austerity measures will open the flood gate for IMF to have a substantial clout that eurozone may deem unacceptable. Eurozone alternative is to compel Greece to cut down her spending and freeze some of the domestic programs which are not sustainable. But the domestic politics can make it difficult for Greece to slash spending, save and generate revenues.

“There are also fears the troubles could spread. The PIGS (Portugal, Ireland, Greece, and Spain) are in obviously in trouble, but debt levels are sky high in countries typically considered more solid: Italy is at 127 percent and Belgium at 105 percent. Austria’s banks have troublesome exposure to recession-hit Eastern Europe. As well, Greece, along with Portugal, Spain and other countries with deficit trouble, may find that unions and voters push back against cutbacks that will take years to show results. With a potential public backlash, their chance to win approval for such measures remains unclear.”

The nations of European Union must adhere to monetary rules and regulations stipulated by the economic and monetary union inorder to maintain a bullish euro. By so doing it can become attractive to perspective investors and nations willing to keep reserves in euro. Although, the disaster in Greece has little effect on the investments on euro denominated assets; but if the problem is left on check the eurozone nations with large deficits will surely depressed investment on euro denominated assets.

“The latest flow figures from fund tracker EPFR Global actually show a small net inflow of $861 million into European equity funds, including Britain, in the week to February 3, with flows to Germany and France prompted by more attractive valuations created by a lower euro. Data held by State Street, meanwhile, contains no obvious evidence of an institutional exit from euro zone assets; the flows which are occurring appear to be no more defensive than those being seen elsewhere during a period of risk aversion for financial markets around the world. This suggests that sharp market movements in the past week — including the euro falling to an eight-month low of $1.3646 on Friday — are more the result of short-term trading than larger, long-term investment decisions.”

The continent of Europe gave birth to the first nation-state but the European Union project is going contrary to the principle of political economy. For European Union to be effective, if not functional, there must be amalgamation of politics and economy. European Union with each member nation piloting its monetary policy cannot be functional. The problem with recent flattering of euro currency is not just the problem with Greece but something to do with fundamental building block of the monetary union especially the financial opaqueness or lack of transparency and probity among member nations.

The purported common monetary policy for Eurozone is metamorphosing into a mirage because each member nation still held steadfastly to its own respective currency together with its monetary policy. The member nations of European Union with its currency at its backward have not truly accepted euro as the only currency.

A strong Eurozone with its euro are good for global economy because it encourages healthier competitions, a booster for free enterprise and unbridle capitalism. When Eurozone fails to put her house in order, it will fundamentally weakens the union and waned down the strong euro currency, even retards the progressive society Europeans are struggling to formulate.

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