Euro Crisis

While in the last post I was determined to write about colonialism and its after effects starting with Kenya, I thought I will take a break and write down first I make out of Euro Crisis (Just finished reading a carnegie endowment report on this). Here is a quick summary of what I understood.
In GIIPS, the new Euro currency increased confidence, lowered interest driving demand up. People and govt. went up hill borrowing tons of money. After averaging inflation levels and public borrowing costs from 1980 to 1990 that are comparable to those of Ghana today, the GIIPS (excluding Greece1) saw their inflation and interest rates converge with those of the EUN (Europe North) during the 1990s. Long-term government bond yield spreads of the GIIPS vis-à-vis the EUN, which indicate the perceived risk of lending to the GIIPS instead of the EUN, fell from 550 basis points in 1980–1990 to just 10 in 1999. However, in GIIPS, more money went into construction etc. than in trade sector. Wages shot up eroding productivity more. Meanwhile, stable economies like Germany got Euro which was cheaper than Mark making their exports more competitive. These economies could fulfill the needs of GIIPS whose competitiveness had deteriorated but the demand was surging. The single European monetary policy was too loose for the rapidly growing GIIPS (Spain, Greece, and Ireland) and too tight for Germany, whose domestic demand and wages grew very slowly compared to the European average. This reinforced the loss of competitiveness in the GIIPS. Without control over interest rates, Greece, Spain, and Ireland were limited in their ability to deal with the bubbles, while Italy and Portugal, both fighting slowing economic growth, would have benefited from looser monetary policy.
The financial crisis in 2008 brought an abrupt end to the post-euro growth model in the GIIPS. As they plunged into recession and tax revenues collapsed, government spending was revealed to be unsustainable and their loss of competitiveness dimmed hopes of turning to foreign demand for recovery. The GIIPS are left with high public and private debts and weak long-term growth prospects, unless they make difficult adjustments to cut deficits and restore competitiveness.

Till next time..