Global economic conditions today are awfully bleak and momentum in global economic growth is certainly uncertain. The European fiscal fiasco jeopardized global growth as a whole and further situations became aggravated with the inability of European leaders to put in place a plausible accord that can ensure a bright future for the Euro Zone.

Reasons for fiscal complications of the eurozone are many and varied, but perhaps fiscal dissonance among member nations is the prime cause for this economic menace. Eurozone as an Economic Union almost failed to maintain fiscal integrity with respect to expenditure patterns of the government and solely focused on monetary management overlooking the totality of fiscal significance.

The root cause of the delayed response to the Sovereign Debt crisis is nevertheless the limited capacity or lack of willingness on the part of the European Central Bank (ECB). A return to economic stability relies on ECB allowing greater authority and becoming a last-resort lender to troubled economies,

Industrial orders in the eurozone fell by 6.4 percent in September, the steepest decline since the dark days of 2008. Another closely watched index, based on surveys of the purchasing manager in manufacturing and services is also precarious, falling below 50 percent to 47.2, where anything below 50 implies shrinking activity.

“Europe is going into recession, if not already in one,” according to Frederic Neumann co-head of Asian Economic research at HSBC. Pranay Gupta, Chief investment officer for the Asia Pacific region at ING in Hong Kong, said “Europe is where the United States was three years ago.”

The financial crisis of 2008 was firstly an output of regulatory deficit over the financial industry and a consequent credit crunch that followed, along with other events such as death of Lehman. However, the eurozone economic headwinds is basically due to exhausted state resources and the high cost of borrowing.

Recently, Germany suffered from a lack of strong demand for its 10-year safe bunds with the government selling only 3.6 billion euro bunds. The results suggest that “Germany is not immune to increasing risk aversion in the euro–zone but market”, according to Marc Chandler of Brown Brothers Harriman.

“The only thing that would work is printing Euros, paying down the debt and risking inflation” said Dave Rovelli, Managing director of U.S equity trading at Canaccord Genuity. The only alternative in sight is to establish a consensus among European leaders as to how to get out of this mess and also, how to avoid falling into the same trap in future.

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The most faltering and tragic questions of the 21st century is how to manage the fiscal system of a country regardless of their level of economic growth. Leaders, politicians, lawmakers and ordinary citizens are deeply baffled and greatly offended by the scale of the problem in their domestic economy, and in the recent global economy.

The economy was still in its sick bed in late 2009 when the Greek government spilled the truth about their official figures being misrepresented for years. The most pronounced effect of the horrific level of public debt has been had the outcome of the unpopular austerity measures.

The unprecedented action to curtail and mitigate the dangerously high proportion of debt failed to bring in the amount of hope that the measures were designed for. Attempts to subsidize or fend-off the crisis were made by the European Commission, the IMF and the European central bank by setting-up a tripartite committee to prepare appropriate programs and economic policies.

A loan agreement was reached between Greece and the other Euro zone members, with an agreement settling on a total of 110 billion €. Greece, being member of the Euro zone, it cannot unilaterally stimulate the economy by expanding monetary policy. According to Vicky Pryce, senior director of economics at FTI, “we will see a haircut on Greek bonds, a recapitalization program of banks and increase in the size of the bailout”

Ultimately, nations under the hammer of fiscal congestion and monetary impossibilities will have fewer possibilities of revitalize the sluggish economy in order to gradually subside the debt debacles. President Obama said when German Chancellor Angela Merkel Visited the US, that “European Debt Crisis must be brought under control predicting disastrous results if there is an uncontrolled spiral and default in Europe”

According to the German Finance minister, Wolfgang Schauble, creditors holding soon-to-mature Greek bonds would need new bonds on similar terms that are payable for several years. But this plan doesn’t release Greece from the shackles of their staggering debt — it only shifts the burden to future generations, providing a short-term relief.

In another plan which has been accepted by the European Central Bank, a ‘no bond exchange’ requires that private creditors can cash in on maturity and be encouraged to re-lend some of their money. This plan is only viable if private creditors believe that re-lending to the government won’t put them back to previous risk levels.

Even so, Greece is not out of the woods completely, since it will also require paying interest with principal for those bonds. Some economists have echoed the option of Greece leaving the Euro zone. Greece has some good reason to leave the Euro zone. If it can devalue its currency, Greek exports will rise and provide a cushion for economic activity and bring in cash.

But it might push the inability of other members of the Euro zone to rescue a financially unstable member country and may endanger the whole financial system of the region.

If Greece withdraws itself from the Euro zone, the confidence in Europe would be tarnished, inviting catastrophic consequences to other debt laden nations like Portugal, Italy, and Ireland. Nevertheless, debt restructuring and beyond could be a possibility now the ECB has granted permission for exposed countries to have unilateral monetary policy.

 
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A group of analysts from the three institutions responsible for granting the country with its next package of financial help, known as the troika, has arrived in Greece to inspect the progress in regards to the budget cuts schedule previously proposed.

If the government doesn’t carry out the timeline proposal agreed by both the government and the troika, it is very possible the latter will not give Greece a vital loan to allow the country to continue with its normal activity. Without that loan, the government will go bankrupt and, therefore, neither Greece’s bonds investors, civil servants, pensioners, and the like will not be paid on time.

For those reasons, the troika, a group comprised of experts from the International Monetary Fund, the European Commission, and the European Central Bank, started to examine the national accounts to verify that the schedule was being followed on September 28.

After September 2, they decided to leave Greece because the government was not applying the measures agreed upon by both parts, thereby putting Greek leaders under more pressure. One of the measures agreed upon was reducing the number of civil servants by 30 percent before 2015 with the immediate layoff of 30,000 employees out of 900,000 employees.

Other measures prescribed will reduce civil servants’ wages and salaries up to 25 percent and include compulsory retirements. These cuts will affect all public services from the health system to education and transportation. Those cuts have caused a deep sense of unease among the Greek population who decided to mobilize themselves to preserve whatever they could from public expenditure cuts.

For instance, the group had to change the place and hour for a meeting with the Transports Minister, Yannis Ragoussi, because some civil servants were protesting against mergers and acquisitions of public companies with private ones, which would result in a decrease in the number of employees by about 10 percent and the liberalization of truck and taxi driver licenses.

In Greece, an unusual day is one without demonstrations. A few days ago, a group of 250 retired soldiers took over some offices in the Ministry of Defense until the minister himself, Panos Beglitis, threatened to resort to the use of force to make them flee. Another example is the students’ strikes, which have taken over more than 400 schools and 100 faculties to protest against cuts in the education system.

All these tug of war games are creating a complicated situation in the country. On one side is the troika, always asking for more and more cuts and new measures to reduce public deficit. On the other side are civil servants who feel as if they are on the verge of being fired, and citizens who see more and more cuts day after day that are worsening the public system.

In between is a government with feet of clay, coping with ministers’ resignations every month, social strikes, and the pressure of the troika. The government is playing a dangerous game: promising a high performance to the troika that they know is impossible to carry out in real life and watching the time pass day after day without being able to find solutions to satisfy both sides.

 
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The possibility of the European Economy inviting the double dip recession is almost certain. Experts say Greece will not be able to pay all of its debt. The fate of Europe and European Economy depends on how effectively countries entangled in debt crisis mitigate its impact.

European leaders, and especially leaders of devastated public finance systems, have lost sleep in order to keep the pulse of their economy beating. They are on the brink of collapse that might potentially drag-back the world economic growth rate to lowest in a decade.

The International Monetary Fund (IMF) and European Union (EU) have been attempting to keep the country solvent to avoid another recession hitting already weak global economy. The most outrageous shock will be on the EU banking industry as a whole, since European banks parked heavy doses of money into sovereign debt in the region.

Of all 17 nation bloc of Europe, exposure of France to Greek debt is $56.7bn, German exposure is $33.9bn, and the UK is $14.6bn. The EU and IMF agreed on 110bn Euros of bailout funds for Greece last year and again this year in July a further provision of 109bn Euros was agreed upon.

In July, European leaders agreed to provide an additional 109bn Euros bailout to Greece as it again came on the verge to default. Even so Greek Economy never settled on to that and situation got much worse. The problem with Greece, Italy, Spain, Ireland, and Portugal in a broader sense, is that they all were living beyond their means.

Over the last 5 years, the fiscal gap had been drenching wider and wider. All these nations had been spending far from revenue which led them to put reliance on debt, and because of this, the debt balloon is so big that it will possibly burst. According to Gary Jenkins, the head of fixed income research at Evolution securities, the timing of a Greek default remains in the hands of the troika (EU, ECB, and IMF), and it is difficult to believe that it will pull the plug at this stage.

Louise cooper, Market analyst at BCG Partners, shared his opinion on the situation. “I’m not sure that more austerity will help, which is troika demanding. What is needed is deep structural reform, which neither the Greek electorate or political class seem to have much appetite for.”

A recent report included a plan to eliminate 25,000 public sector employees hired last year, but according to spokesman for the European commission, Amadeus Altafaj-Tardio, new austerity measures aren’t on the table but negotiations are underway for full-fledged compliance with earlier agreed measures.

With drastic drop in public expenditure on various socio-economic fronts there has been wide-spread anger and violent protest in Greece so far this year. Greek default may sky-rocket cost of borrowing in the region and potentially Europe may face credit crunch which will be greatest hindrance to weak economies of the region.

If Greece somehow manages for an orderly default that might push repayments a decade ahead so confidence in the region might not get shaken completely or otherwise trust in the euro zone may be shattered forever. In its semi-annual World Economic Outlook, IMF gave a statement saying, “Global Activity has weakened and became more uneven; confidence has fallen sharply recently; and downside risks are growing.”

The Fund further said, “Greek default already affecting the world economy. Coupled with the economic slowdown in the United States and the impact of the Japanese earthquake, Europe’s debt crisis is putting the global recovery at risk.”
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