About Me

Oct 28, 2011

Irrational Exuberance: Europe’s New Deal Is Worse Than No Deal

"We can claim that a new day has come for Greece, and not only for Greece but also for Europe," said Greek Prime Minister George Papandreou, whose country's troubles touched off the crisis two years ago. "Let's hope the worst is over." Greek’s worst day may be over. But I don’t think it’s true for Europe.
The deal was struck and stocks and oil are on the rise. There will be a reduction of Greece debts by %50. The banks will prop up to withstand major losses. The Financial Stability Fund will be increased from 440 billion to 1 trillion Euros. I actually don’t expect such a bold move. At the end of the day, I was shocked by the move after spending time thinking for a while.
A debt write-down for Greece is good. At the same time, it creates problems for other European countries. The crises should be contained and solved in Greece.  I don’t think it’s in anyone’s interests for problems to be spread across Europe. The write-down is getting everyday country into troubles.
Strike a wrong deal ?
Don’t count the chickens before it hatched! You may think I jump to conclusion too fast. European political system is being paralyzed, perhaps polarized. Their interests sometimes collide. France and Germany have been at loggerheads. Finland demands recently it receives collateral in exchange for its contribution to the bailout packages.
Anyway, they do a relatively job when it comes to bolstering the Fund.  I read two articles- one by Pual Krugman and one by Gordon Brown. They both proposed that the Fund be expanded to Trillions. Greece is the epicenter of all crises in Europe.
 When Greece goes, so does the Europe. It’s a make or break. They keep repeating the words: Austerities and Competitiveness. If I’m not wrong, another 100 billion-euro-worth bailout is on the way, so do the austerity measures. Austerity and strong growth can’t simultaneously exist.
If they don’t change the game, Greece will downright default later or sooner. Still, I think they want it to happen.[1] If not, austerity measures must be lifted. Sooner, the better. Germany has been very stubborn and inflexible. France has been a good compromiser.
Social safety net is Europe is so costly. They have managed it well. When they transfer problems members’ country, Greece default may not be rewarding as they expect. The consequences will shatter Europe’s financial system. I have one suggestion for Europe. If Greece is set to default, all problems should be channeled to Greece, not to diversify. When Greece defaults, all problems will be fixed once and for all. And the Euro will be safe !
I know that they are under international pressure to get the crises solved. But this deal is worse than no deal. It pleases the market but it doesn’t secure Europe’s future, may even be endangered one.  It may be a fallacy. But I have to say that Greece default may be the only solution to Europe’s crises, if they keep doing what they are doing !