Financial contagion from the Eurozone
Thursday, 25 November 2010
Only last March a member of the European Union (EU), Greece, was on the brink of bankruptcy. It was predicted at that time that Greek crisis was only the tip of the growing financial instability of the Eurozone countries and that others could follow fairly soon. The prophecy has been uncannily fulfilled with Ireland, once described for its economic sinews as the Celtic Tiger, going down on its knees for packaged assistance for its tottering economy this week. The bailout package now being considered for Ireland is in the neighbourhood of Euro 100bn. But the projections are that the rot that showed up with the Greek crisis and now the Irish one, will not be stemmed easily. Financial analysts are predicting its fast spread to some other EU countries such as Portugal, Spain, Belgium and even Italy which is one of the industrially advanced Group of Eight (G-8) countries. They are of the opinion that stop-gap patchwork solutions like in Greece and now in the case of Ireland, may prove insufficient to head off a wider crisis.
The crisis that first turned unbearable in the case of Greece and seems to be headed for repetition in other countries of the EU have fundamentally two characteristics. First, the budget deficits of the concerned countries have been increasing and are currently running at 14.3 per cent of gross domestic product (GDP) in Ireland, 13.6 per cent in Greece, 11.2 per cent in Spain and 9.4 per cent in Portugal. Even relatively richer and considered to be a stronger economy, the UK, is having a budget deficit in the double digits. The budget deficits are too intimately associated with politics in those countries when most people in their senior years want to go on maintaining their otherwise comfortable social security benefits by the standards of developing countries, come what may to their economies from such stubborn aspirations. But such deficits are much above than what was earlier envisaged, particularly at the time of operationalising Euro as the Single currency.
The other aspect of the gathering financial and economic crisis in the Eurozone involves the banking system. The Irish crisis has bloomed in the short term with its banking system having almost neared a collapse from large accumulated bad debts. The integrated nature of the banking systems and the economies of the EU countries have meant that a banking crisis in one country cannot be quarantined. Thus, a banking collapse in Ireland must be prevented for its damaging effects on the banking systems of other EU countries. For example, the British banks have an estimated UK Pound 150 bn of exposure to the Irish banking system. There are also exposures, in varying degrees, of banks in other EU countries to the failing banks in Ireland. Thus, it calls for Herculean financial efforts, indeed, to stop the cancerous growth in the Eurozone from the twin factors of budget deficits and banking crises.
Where the crisis will go from Ireland is still understandably uncertain. Any extensive bail-out apart from Ireland will be a very cheeky issue specially for the Germans who are the strongest economy in the EU at the moment. The Germans are thought to be disgusted with bailouting troubles for banking mismanagement and growing demand from social security and other welfare benefits in the affected countries. How far the fresh demands for German cash will be met smoothly after Ireland, is a big question mark.
The EU and the USA have been the two most developed and resourceful areas in the economy of the world in the post-Second World War period. Emerging countries such as in Asia benefited enormously from robust trading with these two major areas of economic power. With the American economy still in a vulnerable recovery mode after its recent EU-like crisis and the developing crisis in the EU, this situation could put the global economic conditions as a whole on a tailspin. Policymakers in countries such as Bangladesh having their economic stakes in the well-being of the EU and the USA, will have to watch developments in these two mighty economic zones extremely carefully and adjust or readjust their policies with the greatest precision and foresight.
The crisis that first turned unbearable in the case of Greece and seems to be headed for repetition in other countries of the EU have fundamentally two characteristics. First, the budget deficits of the concerned countries have been increasing and are currently running at 14.3 per cent of gross domestic product (GDP) in Ireland, 13.6 per cent in Greece, 11.2 per cent in Spain and 9.4 per cent in Portugal. Even relatively richer and considered to be a stronger economy, the UK, is having a budget deficit in the double digits. The budget deficits are too intimately associated with politics in those countries when most people in their senior years want to go on maintaining their otherwise comfortable social security benefits by the standards of developing countries, come what may to their economies from such stubborn aspirations. But such deficits are much above than what was earlier envisaged, particularly at the time of operationalising Euro as the Single currency.
The other aspect of the gathering financial and economic crisis in the Eurozone involves the banking system. The Irish crisis has bloomed in the short term with its banking system having almost neared a collapse from large accumulated bad debts. The integrated nature of the banking systems and the economies of the EU countries have meant that a banking crisis in one country cannot be quarantined. Thus, a banking collapse in Ireland must be prevented for its damaging effects on the banking systems of other EU countries. For example, the British banks have an estimated UK Pound 150 bn of exposure to the Irish banking system. There are also exposures, in varying degrees, of banks in other EU countries to the failing banks in Ireland. Thus, it calls for Herculean financial efforts, indeed, to stop the cancerous growth in the Eurozone from the twin factors of budget deficits and banking crises.
Where the crisis will go from Ireland is still understandably uncertain. Any extensive bail-out apart from Ireland will be a very cheeky issue specially for the Germans who are the strongest economy in the EU at the moment. The Germans are thought to be disgusted with bailouting troubles for banking mismanagement and growing demand from social security and other welfare benefits in the affected countries. How far the fresh demands for German cash will be met smoothly after Ireland, is a big question mark.
The EU and the USA have been the two most developed and resourceful areas in the economy of the world in the post-Second World War period. Emerging countries such as in Asia benefited enormously from robust trading with these two major areas of economic power. With the American economy still in a vulnerable recovery mode after its recent EU-like crisis and the developing crisis in the EU, this situation could put the global economic conditions as a whole on a tailspin. Policymakers in countries such as Bangladesh having their economic stakes in the well-being of the EU and the USA, will have to watch developments in these two mighty economic zones extremely carefully and adjust or readjust their policies with the greatest precision and foresight.