Market Observations, the future of Europe?
One of the big financial news stories of 2010 has been the near insolvency of Greece and its impact on the euro.
Without a doubt, the big currency story so far in 2010 deals with the solvency of Greece and other nations. To understand the nature of the problem and its possible solution, we will look at three main factors – credibility, fairness and moral hazard.
The Credibility Factor
About a month or two ago, Finance Minister George Papaconstantinou has indicated that Greek government doesn’t need a bailout. The euro popped higher on this news. Many analysts are skeptical because Greek government has a serious credibility problem.
The details are short in supply, further to that word is now circulating that Greece engaged in deception through currency swaps to make their balance sheet look better than actually it was.
Reports in Germany indicated that Goldman Sachs raised about US$ 1 Billion through currency swaps that were not recorded in the country’s budget. The report alleged that “fictional” exchange rate was used to boost the country income. Worse still, the Greek government has denied the use of currency swaps to mask its deficit problem when confronted with the issue in September 2008.
The Fairness Factor
It has recently been noted that many German citizens do not want to offer assistance because the German retirement age is 67, while Greece’s average retirement age is only 61. “ Why should Germans work so that Greeks can retire ?”, they asked. They have a point, don’t they ?
Recent polls indicated that 53% of Germans would prefer to expel Greece from the Eurozone rather than offer a bailout. Greece will undoubtedly raise its retirement age, as well as taxes, but the specifics of any plan have been lacking.
To give you some background, Germany increased its retirement age from 65 to 67 back in September 2007 to deal with a pension funding crisis. This was a tough and painful choice for the benefit of its future economic stability. This illustrates the type of problem that will continue to arise in the future. Unless the European Union(EU) is truly unified with individual countries enjoying similar benefits and playing by similar rules, it is clear that similar disagreements between countries will occur in the years ahead
The Moral Hazard Factor
Even if bailout agreement can be reached, it may not necessarily be good news for the Euro. There is a saying that there is never one cockroach. Witness last year’s bailout mania in the US, with one company after another coming to the Federal government. Would we see a similar situation in Europe if Greece is bailed out? With 8 countries in the Euro zone having budget deficit of more than 10% of their GDP, the answer is almost certainly ‘yes”. Only when the terms of such a bailout are so onerous that the receiving party would agree to participate only as a last resort.
What will be the future of Europe? Many believe that the European Union will actually become stronger, not weaker, due to the problems it is facing today. A stronger EU, with or without Greece, will send a message to other members that fiscal irresponsibility will not be tolerated.
PS : You should ride on the weak Euro for your memorable holiday.