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This year the world witnessed repercussions of the most disastrous and indecisive fiscal management in the Euro Zone that shattered one’s sense of security and disturbed the lives of millions of people.
The debt crisis of a hand-full of members of the Euro Zone has potentially inflicted a wound, that has possibly introduced a series of deathly rating downgrades across the region and exposed a lot of risky behavior, especially in the banking industry, credit markets and dithered global economic recovery.
According to the Oxford Dictionary, the word contagion refers to a communication of disease from one person to another. In the world of finance and economics, it refers to the spread of economic crisis in one county’s bond or equity market to another. In this case, there has been the communication or spread of fear, faithlessness, and inefficiency at the political level and, most tragically, the spread of an illogical attitude.
Greece was the first to be exposed to massive levels of debt and because of its inability to service its debt, apparently under a veil of ignorance and falsehood, became doomed and fear of default spread like a raging fire, putting into question the competency of these countries.
Crisis of Consensus
German Chancellor Angela Merkel said the European Central Bank cannot be relied upon to resolve the crisis, since its statutory role is different from the Federal Reserve Bank or the bank of England. She further said that “no single stroke” will work and joint euro bonds are “unthinkable.”
On the other front, the occasion of the failure of the recent German bond issue, a senior fellow at the Council on Foreign Relations in Berlin said that “it’s only got us closer to the end-game, either the break-up of the Euro or Euro bonds.”
The German Government had always been opposed to jointly-issued bonds, because it involves German taxpayers’ money for members of the bloc, it involves partial backing by German Government and, finally, it will contribute to a rise in cost of borrowing for Germany.
The Catastrophic Logic
In his book, “Back From The Brink,” Alistair Darling said he is gravely concerned that the coalition is repeating the mistakes made during the Great Depression in 1930’s in the United States.
The United States went into double-dip recession in 1937 because its government followed stiff fiscal tightening policies, andUK and debt-laden countries in the Euro-Zone today are following suit.
According to Keynesian school of thought, when effective demand is weak, expansionary fiscal policy should be followed, but under these circumstances, widening of authority of the ECB to finance state expenditure is quite undeniable rather than taking the hand away.
Greece has almost frozen its spending along with Italy to some extent, and it has strengthened the belief that the efforts should be in the reverse order to invite stability across the countries. Hopefully, the new proposal by Merkal to bring in radical changes in treaties will resurrect the rubble.
Image Courtesy of http://www.flickr.com/photos/europeancouncil/