Uncertainty Surrounding the Euro Zone: Political Indecision and Financial Woes

Monday, May 14, 2012

 
Current uncertainties within the European Union are having huge ramifications outside the region causing global markets to retract in caution. This is due to the current ambiguity surrounding Greece’s political landscape, the rumor of the nation’s possible separation from the European Union and the doubt of the success of negotiations between European leaders over the enforcement of austerity measures.

The reluctance of the Europeans to accept the harsh conditions of austerity has been demonstrated through elections of Socialist Governments in France and Greece. Both victorious parties were vocal opposed to the enforcement of strong austerity measures. Francois Hollande, Sarkozy’s replacement, was outspoken against fiscal austerity during the lead up to his position. The New Democracy Party of Greece won most seats in Greece’s May election, but was unable to form government because they did not receive enough support from other parties. For Greece, austerity policies are required to receive a bailout package. Negotiations depend on a synchronized approach by leaders of the European Union to prevent further chaos, limit contagion and input measures to lead to the resolve of issues in the region.

 

There is a silver lining. European leaders recognize that agreements have to be made for progress to transpire. This is suitable evidence to believe that negotiations will not break down entirely. Hollande with his anti-austerity rhetoric is likely to downgrade the austerity negotiations but too much ground has been made to abandon them altogether. Government spending needs to be cut, leaders need to stimulate European growth and create stability in the region. Mr. Hollande has stated that tax reforms, which focus on high income earners, will be a key strategy to reduce government deficits and to release more conservative but likely growth targets. Mr. Guido Westerwelle, the German Foreign Minister mentioned a focus on growth through competitiveness.

 

Decisions to deal with the financial situation of the Euro zone are detracted due to the limbo of Greece’s political future which is a very important topic in regional decisions as political parties struggle to form a government. Possible collaborations are in discussion, talks which have faltered then re-commenced.

 

This uncertainty has a huge impact on global markets as concerns that key austerity measures may not be able to be implemented and that Greece may ultimately be pushed out of the European Union. The implications of this occurrence will have negative and positive consequences. After the fist upheaval, if Greece is forced to depart the Euro Zone its economy will begin to recover. Its revived local currency will be depreciated against the Euro. This will make Greek exports more globally competitive, tourists will have a huge incentive to visit the nation and investment possibilities will be more attractive as Greek companies become cheaper. On the downside, Greek savings will diminish and international debts will become staggeringly high.

 

If Greece stays in the European Union, economic growth will be the way to fix this problem, this would by aided by a depreciation of the Euro. This strategy has been shown as an effective method. During the Asian Financial Crisis in the 1990’s, South Korea was also in a financial catastrophe as the ‘won’ depreciated strongly in response to huge corporate debts of large Korean companies. The depreciation caused South Korea’s economy to plummet in 1997 but by 1999 GDP had increased by 11.1%. During times of financial crisis other nations have successfully devalued their currencies to allow strong exports to revive their nation including Sweden after the banking crash in the early 1990s and Argentina in 2001. The Argentine Economic Crisis of 1999-2002 was similarly caused by a decrease in tax revenue and overspending by the Government of the day which led to high rates of state borrowing. In all of these examples, the economy initially retracted, only to recover all the more vigorously.

 

Greece is due to hold new elections this June. It is hoped that a definitive choice of party can be made and so financial management negotiations can continue with a stable and long-term government.