This article spotlights two of the root causes of the crises in Europe - namely, (i) broken governments that spend beyond their means and the (ii) moral hazard that exacerbates such overspending.
Greece Example:
Greece spent too much money raised through issuing debt (which increasingly looks like an imminent default) and creditors continued to lend Greece money under the belief that Greece wouldn't be allowed to default by the rest of the Euro countries.
There's no painless way to fix this mess, but I don't think giving Greece a massive one-time bailout sends the right message to the rest of the Euro countries (and countries' creditors) regarding moral hazard. The citizens of bailing-out countries (e.g. Germany) will be incredibly angry, rightfully so, and who knows how that will play out. On the other hand, small delaying actions like the ones that have been taken since the Euro crises began only worsen the situation and undermine global confidence in European leadership.
Personally, I think the creation of a common currency (Euro), without a corresponding enforceable common fiscal policy, is the root cause of the global impact of this crises. One member of the common currency can bring down many of the rest of the members by contagion so essentially, the coalition is only as strong as its weakest link. The weakest link can be strengthened by enforcement of a common fiscal policy, but there was clearly no such common fiscal policy being effectively enforced in Greece.
Another problem with the common currency is that Greece cannot devalue its currency to (i) make its exports more competitive (thereby improving its economy) and (ii) lessen its debt load through inflation. Before the Euro, the Greek Drachma could have been devalued in order to accomplish (i) and (ii). Now, Greece has no way out other than default or waiting for a bailout which may or may not come.
No easy answers here, but my guess is that Europe will continue to incrementally increase its "help" to Greece and other struggling countries until a major comprehensive bailout is required. Similar to as in the US with its banks a couple of years ago, such comprehensive bailout will occur, global taxpayers will lose, and the cycle will continue until we see an even bigger problem next time. Happy thoughts to start off my morning...
Most smaller countries with their own currency can not do (ii), because they can only get dollar or euro denominated debt from international markets/institutions.
Depends on whether they are running a current account deficit too, in which case there will be net borrowing from abroad. Many countries borrow quite substantially abroad.
Greece Example: Greece spent too much money raised through issuing debt (which increasingly looks like an imminent default) and creditors continued to lend Greece money under the belief that Greece wouldn't be allowed to default by the rest of the Euro countries.
There's no painless way to fix this mess, but I don't think giving Greece a massive one-time bailout sends the right message to the rest of the Euro countries (and countries' creditors) regarding moral hazard. The citizens of bailing-out countries (e.g. Germany) will be incredibly angry, rightfully so, and who knows how that will play out. On the other hand, small delaying actions like the ones that have been taken since the Euro crises began only worsen the situation and undermine global confidence in European leadership.
Personally, I think the creation of a common currency (Euro), without a corresponding enforceable common fiscal policy, is the root cause of the global impact of this crises. One member of the common currency can bring down many of the rest of the members by contagion so essentially, the coalition is only as strong as its weakest link. The weakest link can be strengthened by enforcement of a common fiscal policy, but there was clearly no such common fiscal policy being effectively enforced in Greece.
Another problem with the common currency is that Greece cannot devalue its currency to (i) make its exports more competitive (thereby improving its economy) and (ii) lessen its debt load through inflation. Before the Euro, the Greek Drachma could have been devalued in order to accomplish (i) and (ii). Now, Greece has no way out other than default or waiting for a bailout which may or may not come.
No easy answers here, but my guess is that Europe will continue to incrementally increase its "help" to Greece and other struggling countries until a major comprehensive bailout is required. Similar to as in the US with its banks a couple of years ago, such comprehensive bailout will occur, global taxpayers will lose, and the cycle will continue until we see an even bigger problem next time. Happy thoughts to start off my morning...