Thursday, 19 February 2015

They all have to do more

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In order to resolve the Euro problem ( I would not call it Greece problem as the issues involved are much wider than Greece) everyone involved has to do more.

Greece needs to:

  • commit itself unequivocally to repayment of their loan obligations.
  • commit itself to restructure its economy and especially to prop up its tax compliance and collection mechanism and to stamp out corruption which is stifling economic growth.
  • commit itself to taking business friendly measures to attract FDI.  This has to include privatisations already agreed upon even if they are delayed to ensure that the best possible return is obtained.
  • commit itself to taking measures to dismantle monopolies and to make its economy more flexible, in particular its labour market which cannot continue to protect those who have jobs at the expense of those who are unemployed and blocked out of the labour market.
  • commit itself to a reasonable ( even if reduced from what was committed to earlier) primary balance on its budget and in its balance of payments.
Creditor nations have to realise that:

  • Any union without an element of solidarity is not a union at all and will eventually destroy itself.
  • Problems of debtor nations have to be addressed through real economic restructuring but in the context of growth rather than blind austerity.
  • Where austerity is needed it should be spread in a socially acceptable manner rather than being carried disproportionately by the bottom layers of society.
  • Restoration of equilibrium needs action also from the surplus side not just from the deficit side.

European Union should take the initiative for:

  • The European Stability Mechanism ( ESM) taking a primary role in resolving the problems between debtor and creditor nations, in particular:
      1. The Troika ( EU, IMF and ECB) should be replaced entirely by the ESM who will keep the IMF only in a consultative role.
      2. All debts of countries under bailouts held bilaterally by EU countries and by the ECB should be transferred at original cost to the ESM who will fund this by issuing cheap long term bonds which will be bought by the ECB instead of their QE program ( which could create more problems than it solves).
      3. All debts of debtors nations with debts exceeding 100% of their GDP should be converted into long term contingent GDP coupon bonds - where the interest rate is variable to the GDP - whilst the capital remains intact and repayable in equal annual instalments after an initial moratorium of say 10 years.
      4. Countries with structural Balance of Payments surpluses ( e.g. Germany who are consistently running 7% GDP  BoP surplus and evidently taking extreme advantage of the weakness of the Euro currency caused by problem countries) should pay a fixed percentage of their BoP surplus as non-refundable contribution to the ESM.
      5. The ESM will use the contributions received as in 4. above in order to reward problem countries with an element of debt foregiveness if they reach benchmarks proving their economic recovery - thus rewarding sacrifice as results will start to show.
Expecting debtor nations to resolve their problems without a burden sharing arrangement is the best way to ensure that the Euro has no future.

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