Earthquakes & Euros. By Ayush Varma

The Mayans envisaged unprecedented geographic calamity-violent earthquakes, cataclysmic eruptions, and crushing tsunamis-which would inevitably spell the end of mankind. Fortunately, apart from a so-called ‘drought’, British weather remains as miserable as ever. Perhaps, the manifestation of this ‘apocalypse’ is far subtler? It could be, that on the ill-fated, 21^st December 2012, rather than the whole world coming to an abrupt and agonizing end; the curtain falls on the Eurozone. Let’s face it; the latter is the more probable outcome. On a positive note, if a Euro-collapse, is on the cards, we can take steps to avert Armageddon.

Back in May, the cynic inside of me, was desperately hoping SYRIZA would win the Greek legislative election; in doing so, making the important decision that Euro leaders have for so long shied away from. A Greek exit should have taken place when, Papandreou, first came begging for a bailout. At worst a couple of banks, primarily French, would have defaulted; but it would have saved the Eurozone billions that it has since invested; and most importantly, salvaged some of the lost confidence in the Euro. I still believe it isn’t too late.

I do acknowledge that a return to the Drachma would bring immeasurable hardship upon the common man. But, we have to look at the bigger picture. A Greek exit, in comparison, would bare more trivial consequences than a Euro collapse, on the global economy. It is also worth noting unlike Spain or Italy, who are in similar predicaments; Greece isn’t a vital cog in the wheel of the Eurozone. It only contributes to 2.65% to the total GDP of the Eurozone, and neither are there significant trade benefits to warrant their stay. Their exit would help to restore confidence, allow the Eurozone leaders to concentrate their energies and money on Italy and Spain, and will provide a solid platform for recovery.

A ‘Grexit’ ought to be the first phase of recovery; the next stage is the most crucial and perhaps, the most uncertain, in terms of outcome. There are three main alternatives- Eurobonds, austerity, and a European Monetary Fund. At first, Eurobonds are a very inciting prospect. Rather than investors loaning to individual countries, Eurobonds involves them loaning to the Eurozone as a single entity. It’s seemingly a ‘win-win’ situation- investors are more willing to invest, whilst the debt-ridden countries of the Eurozone are provided with vital funds required. My main worry is that inevitably a free-rider problem will arise, which would result in the big fish burdening most of the liability, that could have an adverse affect and jeopardize their individual recoveries and therefore, is not a viable route.

As it’s a ‘sovereign debt-crisis’ austerity, inescapably, austerity has to be one of the remedies in the mix. To all of those vying for Keynesian policies, it’s simply ludicrous-it’s a debt crisis; the idea of borrowing to spend is fundamentally a wrong one! Though, through a mixture of foreign direct investment, and, government spending, governments in the Eurozone have to invest in their primary and secondary sectors. One of the things this crisis has highlighted is the over-reliance on the tertiary sector, and the large current account imbalances of some nations. These measures will help to address these shortcomings.

Personally, the most appealing solution thrown into the basket is the proposal of a European Stability Mechanism. I can hear a few groans, and moans-it’s just means more austerity doesn’t it?

The main proposals are…

• Keeping government deficits below 3% of GDP
• The maximum structural deficit a country can operate is 0.5%

The proposals will be legally binding; in addition, the agency will monitor governments, and charge those who exceed targets.

I feel it’s promoting fiscal discipline, rather than austerity-and I think we rather learn our lessons now, and avoid a reoccurrence. Though, my only gripes are that it’s going to be incredibly difficult to enforce and monitor, and that the initial blueprints are quite limited-many other problems are left unaddressed.

Over the course of the recovery period, it’s imminent other countries too will falter. Depending on their relative size, and importance in the Eurozone, each country will have to be dealt with individually. God forbid, a country finds itself in a position similar to Greece, again after weighing its economic significance; defaults and exits have to be considered. I do fear, Greece’s exit might come a bit too late, but, in the future, the leaders have to be more decisive on such salient issues.

Lastly, I think the Convergence Criteria of the Maastricht Treaty, ought to be redrawn. It has clearly failed, as its prime purpose, was to avoid such a situation!

I hope the 2012 prophecy doesn’t transpire, just like the other thousands of doomsday prophecies that have come before. I guess we’ll just have to wait to see what our fate will be on December 21^st. There are one of three possible outcomes; a large wave sweeping us away; or an economic earthquake that will shatter the Eurozone into pieces; and lastly, another ‘non-white’ Christmas in recession.