The generalisation of the steps taken by the European Central
Bank (ECB) to get Europe out of a crisis has shown the major weaknesses in the
single market system as the same actions affecting 17 different members. It
will be a lot more difficult to enter the recovery stage of the Euro area as
countries are facing economic as well as political crises. The Euro members who
have been affected more negatively from the
crisis have been bullied by the IMF as well as the ECB to go through
with excessive austerity measures which in turn have hindered more than helped
their economies. This can be seen with the PIGS countries (Portugal, Italy,
Greece and Spain) which as stated above are facing political and economic
challenges, Greece for example who has implemented intense austerity measures
have managed to hurt their own economic growth as excessive austerity has
spread towards excessive protests ( so much for the free movement of labour). Nevertheless, one must not forget
that each country has different traditions, cultures and history, for example
if the Greek people would pay their full share of taxes then Greece might be in
a better position, also if the Greek officials were more careful and less
corrupt with EU funding then they would definitely be at a more stable state,
but as I said each country has its different cultures and traditions which is
one of the reasons as to why the Eurozone can be seen as inefficient.
The political crises are not aiding the economic outlook for individual
countries and Europe as a whole. We can see this with the current situation in
Portugal, where two weeks ago Portugal's Finance Minister Vitor Gaspar as well
as Foreign Minister Paulo Portas who lead the Popular Party, both resigned due
to disagreements regarding the austerity Portugal will impose. As a result, the
signs of political unsustainability have affected the country economically where
its 10-year-bonds rose over 8% making it a riskier investment reflecting not
only the economic outlook of the country but also the direction it is heading. Furthermore,
the comments coming from the ECB don't have much of an effect as they are bland
and extremely general, for example the comment given by Mario Draghi regarding
the new Finance minister of Portugal; 'We are
reassured by the new minister, by everything we know about her, so from this
point of view, Portugal is in safe hands'. This comment either undermines
everyone's intelligence that the new minister is qualified for the job or she
isn't qualified and Draghi is trying to comfort people so that they don't panic
concerning Portugal's future. What's more, Europe is interconnected, hence,
as well as Portuguese bond yields rising so did Italian and Spanish yields, in
addition, the main stock markets throughout Europe closed more than 1% lower.
This shows the huge responsibility one central bank has to take on and so far
unfortunately it hasn't been doing a great job. If we look back in history at
the Asian crisis of 1996 some of the actions they were advised to take were to
raise interest rates and keep spending under control which is the opposite of
what the ECB has done now that Europe is in a crisis. In addition, there have
been talks to further decrease the base rate which will hinder the members with
stronger economies such as Germany in order to compensate for the state the
weaker countries are such as the PIGS, this is yet another example that a main
central bank cannot have full control over 17 countries with the same currency.
England
on the other hand which has its own central bank is on a much better track
towards recovery principally on the data which has come out so far. First of
all, the government hasn't exaggerated their need for austerity measures which
is a huge bonus as it keeps the economy beating. Moreover, monetary policy has
been injecting £375 billion through quantitative easing which helps to stimulate
the economy although the credit channel (mostly banks) have been strict on
lending even though the Bank of England has tried its best to try and encourage
lending by banks. In my opinion England should now consider to increase its
base rate (and not decrease it as some members of the Monetary Policy Committee
were assessing). The reason for this is simple, although the crisis has not
passed, there are positive signs in the economy, such as the seasonally-adjusted basis construction output rising
to 4.6% in April in relation to March as well as the sector growing for a
second month in a row in June, plus, business confidence is said to be at its
highest level since 2007, added to, export sales having grown at the fastest
rate since the British Chambers of Commerce (BCC) began publishing in 1989,
last but not least, the housing market is also increasing especially in London,
where nationally values have risen 2.5% from a year ago. Thus, the economy
indicates it's on its way to recovery, and so luckily Mark Carney became the
chairman of the Bank of England (BoE) at the right time to support the economy
recover, hopefully he will do as he said and sacrifice the inflation target in
order to achieve economic growth. The BoE should increase the base rate, not
only to stop the economy from spiralling out of control when lending and credit
become more accessible again but as a sign also. A signal to the rest of the
world England is doing well and is on its way to recovery whilst other
countries are still in crises, even if it is not, just the mentality of England
is recovering will help, also don't forget the influx of hot money entering
England after the base rate has increased.
Therefore, better moderation and regulation
needs to be implemented when the EU funds projects so that the Spanish don't
build unnecessary airports and the Greeks don't build pointless infrastructure. Free trade and the
free access to labour is good but the single currency which doesn't regulate,
properly examine where its loans end up as well as who joins the club (Greece
with false statistics) it is nearly impossible to maintain full control of the
member states. The ECB cannot fully monitor as well as have full control over
such a vast area where member states differ in many different ways as their
economies are supported by different sectors, for example Germany has a strong
services sector whereas Italy has a much stronger manufacturing sector. Thus,
the decisions and actions the ECB takes will affect different member states in
different ways. The Greeks are different
than the French who are different from the Germans who differ from the Spaniards
and so on, thus with such adverse traditions and cultures using the same policy
on all countries is an intolerable idea which cannot push through in times of
hardships as these different member states need a different combination of
monetary and fiscal policy, and currently they are only getting one of the two,
fiscal, which is not the whole solution towards recovery. And so, the EU could
learn a lesson or two from England's independent stance on having full control
over its monetary and fiscal policies.
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