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No matter what, Europe has to tighten its belt

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No matter what, Europe has to tighten its belt

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The European debt crisis, which has been at the forefront of global economic concerns recently, has triggered unwelcome volatility in the financial markets. As the issue has become more complicated and people’s living standards continue to deteriorate, heads of various governments have come under immense pressure.

Nicolas Sarkozy, the ex-French president, is now the 11th European political leader forced out of office largely because of the debt crisis. And he will probably not be the last. Meanwhile, his successor, the new French President Francois Hollande, has pledged to renew economic growth and improve people’s standard of living. That said, his cabinet has had to initiate belt-tightening measures by setting an example with a voluntary pay cut.

Euro

Voters not happy with austerity policy

The debt problems in Europe are a sequel to the global financial tsunami. When the crisis erupted, the EU was sluggish and hesitant in response. Policymakers of various governments held different opinions. It was not until some countries were reduced to virtual insolvency that the two major European powers, Germany and France, agreed to take the lead in forcing their errant EU co-members to strictly implement austerity. However, this inevitably involved layoffs and welfare cuts, prompting citizens to take to the streets in protest. They felt that they were being made to pay for the wrongdoings of the governments and the banks. They also voted against the ruling parties in elections. When this change of power spread to France, and Germany’s ruling party suffered a setback in local elections, it represented a rising tide of doubt about the need for austerity.

What to do when creditors are on your doorstep?

Europe has always attached great importance to labour welfare. With immense government structure, European nations are used to implementing higher minimum wages and shorter standard working hours along with other forms of social protection against unemployment and retirement. This is the European version of “everyone eating from the same big pot” as the Chinese saying has it. It took first Britain’s Margaret Thatcher and then Chancellor Angela Merkel of Germany to show that structural reforms implemented with a carrot-and-stick approach could help their respective countries weather financial turbulence.

The global financial crisis, which originated in the US, was actually a bursting of various asset bubbles. Governments responded by printing money to buy US bonds and make up for the deficit. America has too many creditors and all other countries can do to help is continue to buy more bonds. However, the Europe bloc, especially those member states who are particularly poor at financial management, now have creditors on their doorstep and face the prospect of their treasury bills being reduced to trash. Finally, the “fire brigade” made up of the Germany-led European Union Central Bank and the IMF has had to come to their rescue and extend new loans for the debtor states to cover their old ones — on condition that they agree to tighten their belts.

Greece has already been coerced into accepting the strict terms of the latest bailout. In order to sort out the problem in the long term, the country must explore avenues of new financial resources on top of cutting expenditure. The Greek people, in desperation, are increasingly turning to extremist politicians who advocate defaulting on the country’s loans.

Stimulate the economy first, regardless of deficit?

The freshly elected Socialist French leader Hollande has proposed substituting “growth” for “austerity.” In fact, some neo-Keynesian experts, such as the Nobel Prize-winner Professor Paul Krugman, argue that both the US and Europe should revive the economy first by increasing public spending before addressing the problems of financial deficit and national debt.

Should President Obama win a second term of office, he will probably take Krugman’s advice. Furthermore, he may even adopt a two-pronged approach by imposing heavy taxes on the rich.

But for Europe, this would be much more difficult to do. If the euro has to be maintained, no European state can continue to be a spendthrift. They have to be frugal, or else there will be a panic sale of their treasury bills, thus greatly increasing the probability of sovereign-debt default. Therefore, many newly elected governments realise that they have to continue with austerity policies after carefully going over their books. It seems that Hollande is unlikely to come up with anything new. But it is fair to say that he set a good example when he and his cabinet members took the lead by cutting their own pay by 30 per cent.

Innovative technology needed to upgrade productivity

The outbreak of the financial tsunami should have ushered in a relatively long period of recession in the world economy. It should have been a process of “only the strong survive” pending another round of economic revival. Instead, politicians chose to print money to bail out the markets. Up to this moment, the US still resorts to such artificial means, though Europe does not appear to have the will to follow suit.

European Central Bank

The only sure way to forestall another depression is to cut budgets, increase incomes and enhance productivity through innovative technology. Unfortunately, many Europeans are used to enjoying life without undue effort or sacrifice. They are neither willing to cut expenses nor do they seem able to innovate. These nations would become “orphans” if they withdrew from the euro zone, and hyperinflation would follow. They cannot afford to take such a risk. Hence, Europe will continue to be overshadowed by the debt crisis in the days ahead.

 

 

Manulife is not in a position to verify the content of the above article provided by the writer strictly for information purpose and does not guarantee its accuracy or reliability and accepts no liability (whether in tort or contract or otherwise) for any loss or damage arising from any inaccuracies or omission.  Any opinion or estimate contained in the above article is made on a general basis and is not to be relied on by the reader as advice. 

 

 

Peter Tsang

About the writer

Peter Tsang is a professional columnist for electronic media, online media, newspapers and magazines. Having worked in the news media for more than twenty years, Mr. Tsang is also a well-known financial commentator and expert in international affairs. In addition to serving Hong Kong’s media, he was once a special correspondent for the German Press Agency, dpa.

He has authored several books on investment and international situations, including Practical Tactics for Value Investment (《價值投資實戰》), How to Indentify Super Value Stocks (《發掘超值股》), An Investment Guidebook in Hong Kong Stocks (《香港股票投資指南》), An Investment Handbook in Stamps (《集郵投資手冊》), and The Third Indo-China War (《第三次印支戰爭》).

Mr. Tsang graduated from Wah Yan College, Kowloon and Hong Kong Baptist College, and has become a follower of the Commodities King, Jim Rogers, in Value Investing.