EURO, EUROPE, EUPHORIA

                                     

When economic union of Europe became monetary union, there were lot of euphoria around, almost everyone barring few exception saw the underlying dangers as well, there is classic rule which is as true in economics as it is in life, the rule is, bigger the gain , bigger the risk.

There were lot of gains to be realised and it was realised as well, Europe saw one of the biggest peace time expansion in recent time, adopting single currency reduced the transaction cost considerably, the risk and cost of exchange within the countries were almost disappeared, the flow of resources fastened, the public spending for welfare also called transfer payments scaled up across the Europe, 2000s were the best period, post war.

Literally speaking, this arrangement created the problem of moral hazard, which means, that smaller countries started overlooking the rules of game because they knew that bigger and powerful countries like Germany and France would never let the system fail, as they have bigger interest in the stability than others. So the unmindful expansion of public welfare expenditure to win votes led them to a situation where there debts were higher than their incomes, credit rating agencies quite falsely believed that wrongs of weaker can be masked by rights of stronger, they stopped looking them as individual nations, need to follow the rules, and rather there were seen as a block called European union.

Problem aggravated not only because their imprudent fiscal behaviour but thanks to financial crisis, their sources of fund flow, the banks, suddenly found themselves starving out of cash, and started looking for different avenues. To correct the problem these countries sought the debt restructuring (means changing the maturity, payment option and interest on borrowings) , support from multilateral agencies, and some of them went for expenditure cut that resulted in political chaos, all the four countries of pigs group saw their top political leaders leaving their post .

If a country has its own currency than most of the economic problems can be solved, for ex. Huge debt may lead to reduction in sovereign ratings that result into less inflow and more outflow of foreign exchange that again lead to depreciation of currency, making its exportable cheaper and importable costlier thus increasing countries competitiveness in world market further leading to generation of employment and income, but in this case of euro crisis, countries had common currency and they have no power over its adjustment, thus correction became all the more difficult.The fear of euro break or the great collapse became stronger, but now at this stage collapse of euro will have disastrous results both politically and economically, a silver lining has appeared in form of ESM the European stability mechanism, which guarantee to buy unlimited bonds or in other words guarantee to give unlimited loans to crisis countries, it might save them from fall, but real problem is not only of fund rather it’s about the way they conduct their economies. And at the end of the day these panic measures by strong countries in the block only confirm their cynical fiscal behavior and our worst fear, that stronger will not let weaker fall.