by CHRIS GRAEME chris.graeme@theresidentgroup.com
A top political analyst and EU watcher says that Europe needs to find a political solution to the current Euro crisis urgently or the world could plunge into the worst economic Depression since the 1930s.
Domingos Ferreira, a politics lecturer at Texas University and Lisbon’s Universidade Nova, says a five-point action plan needs to tackle the sovereign debt crisis:
1) Increase the funds in the European Financial Stability Fund (EFSF) by at least a trillion Euros
2) Write-down and extend the payments period (rescheduling) of Greece’s €350 billion debt
3) Create a system of Eurobonds
4) Create a European-wide growth strategy
5) Shore up the banking system in Europe with a €100 billion recapitalisation programme.
“It’s ridiculous and tragic to see the lack of consensus and decisive decisions coming out of Brussels,” he said, adding that if agreement was not found and countries like Greece, Portugal and Italy defaulted, either in an orderly or disorderly fashion, the consequences for the European and international economy would be catastrophic.
If Portugal were forced to leave the Euro, its currency would be devalued overnight against stronger currencies leading to impoverishment among ordinary citizens.
Banks would have to be nationalised in order to avoid collapse from a run by depositors seeking to withdraw their money in Euros, inflation would be rampant and more companies would go to the wall.
“It is unforgiveable that the intellectual arrogance of the main European leaders has not enabled them to learn anything from the major world economic crisis of 1929,” he told the Algarve Resident.
He said that it was also unforgivable that there had been no concrete decisions from France and Europe at either the last European Union meeting or the G20 meeting in Cannes.
The G20 meeting last week ended up in being a flop despite the fact Europe had to take urgent decisions on the sovereign debt crisis.
These urgent five points of action are needed to create a firewall against not only contagion but also further market speculation.
The danger now comes from Europe’s third largest economy, Italy, whose debt has now reached €2.8 trillion or 120% of its GDP.
“Italy’s inept part-time prime minister, Silvio Berlusconi has failed to implement any structural readjustments to its ailing economy, despite coming under increasing pressure from its European partners,” he said.
As a consequence, apart from putting more pressure on the Euro, the country has now been subject to a further downgrade by international ratings agencies.
This means that investors, fearing an Italian default, can demand higher and unsustainable interest rates on sovereign bonds which has created interest rates nearing the dangerous seven per cent threshold.
The problem of the trillion euro fund which had been agreed in principle by the European Union begs the question: where is the money coming from?
The answer is that it will come from each of the Euro zone member states which will have to get into debt in order to finance it, going to the same markets that are speculating with the sovereign debt of the peripheral countries.
While those countries in northern Europe with stronger economies will achieve that borrowing at reasonable interest rates, the same cannot be said of those countries like Portugal and Spain who are in difficulty and will not get the money for sustainable interest rates.
“The ECB needs to alter its rules and abandon an economic policy based on Euro stability, which it inherited from the Bundesbank, very useful in the post-war world but totally inadequate given the current crisis,” he said, given that inflation was not the main worry now.
The ECB needed to not only guarantee the backup of the debts of those European countries in difficulty, but also needs to implement a policy of growth and job-creation. Only through a wider approach can Europe avoid disaster.
