Euro Crisis Immediate Solutions


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Simple Solutions to address the Euro crisis.

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Euro Crisis Immediate Solutions

  1. 1. Global Economic Crisis – Immediate SolutionsThe turbulence we are going through is unprecedented in the world History. Whatstarted as A financial institution failure, affected not only the leading financialinstitutions in the world but also the major developed economic systems in the worldleading to a systemic failure.Unlike in the past , when it had an impact on only a few countries and few assetclasses, this time, the crisis had its effect on almost all countries in the world and allasset classes. The crisis had a contagion effect and spread far and wide without anend in sight creating more and more uncertainties day by day.When Government creates stimulus it goes to increase the government debt makingthe government vulnerable to financial weakness. In a few cases , where there was agovernment failure, investors have taken an hair cut in their investments. But inGeneral, Sovereign debt is supposed to be more trustworthy since Central Banks canprint money to lend it to the government when in need.Governments in an effort to stop economic slide, tried many measures includingMonetary and Fiscal Stimulus but black swan events had overtaken the efforts ofgovernments. Many of the developed countries printed more money and tried tostimulate the Economic Growth and reduce the unemployment. But it has gone into aspiral. The only effect is the outstanding debts of governments are going up, theircredit rating is being downgraded and there was a lot of trust deficit betweengovernments.,Banks and investors.Everybody is in a dilemma searching for solutions and immediate remedy. Theeffective solutions are eluding the policy makers..According to Classical Economics, Printing money is likely to increase the demand,inflation and reduce the value of money. This is true in cases of countries where thepotential for high growth, high employment levels and low debt repayment needsexist.Economic History has proven that only a few countries at any point in time have higheconomic growth rates and those who were growing at high rates for long periods oftime will see a decline in growth and potential for growth is almost negligible.The developed countries which are affected by crisis today has less potential forgrowth , less opportunities for providing additional employment and supply exceedingdemand levels for many of the product categories. The scope for stimulating thedomestic demand and increasing inflationary tendencies are limited.The need for new money creation has to continue in these economies till theyachieve an economic balance but with a difference. The classical economic theorieswere created when the world was very simple, the financial architecture in the
  2. 2. economies were very simple, the products available in the financial market werevery simple and transparent. The world was not integrated like today. The theoriesproved right, whenever there was an economic crisis.But we are living in a modern world with many factors influencing the economicperformance and it is very difficult to exactly quantify the impact of each factor on theeconomy. The present crisis gives an impression that there is no solution in sight.There is a fear, gloom and high level of uncertainty.The crisis in Europe today is due to high level of government debt which was createdbecause of the high acceptance of debt denominated in Euro issued by membercountries. Only the Monetary union happened and to some extent economicintegration. There was a total absence of Fiscal Union and Political Union and lackof full economic integration. There is a need to move towards a fiscal integration andmember countries should give the mandate to Germany and France to evolve a fiscalsystem within Euro Zone as if it is a Federal Structure. The Fiscal union is theimmediate need.The crisis today is due to Debt at Country Level , Province/State Level, MunicipalLevel, Corporate level and individual level. All the players in the system are affectedbut the degree of impact varies on each stake holder. Unlike in the past, it looks likethe issue could not be resolved within a short period.One solution seems to be in sight, that is the way in which the debt levelscould be reduced for all stake holders. This could be achieved through creatingmoney by Government without adding debt to its balance sheet. That is to just printmoney and allocate to all the Stakeholders based on criteria to be evolved which willensure the viability of the macro economic system, banking system, corporate sectorand individuals who are indebted. The amount of money to be created depends onthe need of all the stakeholders. It could be capped at 25% of the money incirculation today. This strategy might require, control of inflation within specifiedlevels and managing the currency exchange rate within a specified levels. Since theactions taken in one country will have impact on all other countries in the world therehas to be a coordinated action which is facilitated through a body like IMF. Thisstrategy will change how Economic systems function, Capital markets work andtransmission of money takes place. How this system will work can be tested throughapplying this concept to the most affected country in the world today and see theresults in six months and if after effects are manageable then this concept could beimplemented in other countries.Introducing this system will make the economic systems viable. Improve the liquidity,bring back the trust levels. , removing the gloom and doom and make the financialsystems functional. Today, financial systems are in a limbo and their traditional rolesin financial sector have been totally hampered . The employment levels will go up.Adopting the above strategy might require a close coordination of Fiscal andMonetary functions in a country and both Fiscal and Monetary policies have to bedeveloped in an integrated manner. There has to be an increased integration
  3. 3. between all the regulators in a country and continuous exchange of information onthe developments in each domain.The Analysis to be done and the parameters to be tracked.Analysis of Debt with the average maturity period of the debt with Aging profile.At the Country LevelState/Province LevelCity/Municipal LevelCorporate DebtIndividual debt.Criteria for determining the Printing of Money without Creating Debt for theGovernmentTotal Debt in the system / GDPGovernment Debt / GDPExternal Debt / GDPRepayments/ GDPExternal Repayments / Reserves.Forex Reserves / Negative BalanceBudget DeficitCurrent Account DeficitGDP Growth Rate /Potential Growth rate for next 5 years.Interest RatesInflation and the likely trend in 5 years.Unemployment level. and the likely trend in 5 years.Distribution of Money Created.The end use of money created should go to reduce the debt levels of stake holdersincluding investment in Equity capital . The government can invest in Equity capital ofBanks and Companies. Whenever governments had given stimulus in the form ofinvestments in shares of companies, when there was a boom , governments wereable to exit the investments at good profits.There has to be a careful deployment of the money created and as per the criteria tobe developed in consultation with a body like IMF, World Bank.These are my initial thoughts and this concept could be further refined and modifiedafter discussions and debates. Hope adopting this approach would help to addressthe issues before the world leaders in the Short term.R.Kannanwww.indiaat10.blogspot.com6th December 2011