Journal The Cyprus crisis’ management & the opportunity to lower austerity in Europe

 

The Cyprus crisis’ management & the opportunity to lower austerity in Europe

24 March 2013

Last March 8-9, I attended the 2013 Financial Markets Workshop organized by Ambrosetti in Cernobbio.

Among other financial experts, Nouriel Roubini and Richard Koo.

In summary, a fair economic outlook, however, today's austerity is broadly perceived as excessive.

Here are my key findings:

- Although the global financial markets are rallying, the real economy is slowing down, also due to austerity and public sector de-leveraging.

- When 15 years ago Japan faced its "balance sheet" recession which resulted in the collapse of the houses' prices and reluctancy from private sector and households to borrow money, the way out was government borrowing money to sustain infrastructural investments, as the interest rates remained low.  In Europe, due to the dot.com bubble, Germany faced a similar recession when the Euro was established, but obtained a fiscal relief for a few years. This resulted in significant savings in the early 2000's which kept houses' prices stable and improved Germany's productivity, while the rest of Europe was borrowing money thanks to very low interest rates.

- At this stage, probably EU should manage the States' deficit in a different way: for the States who are facing a balance-sheet recession, EU should support fiscal policies to increase their deficit and sustain their economies until they are out of the balance sheet crisis.

- Actually, the financial resources which may be required to support this intervention are available, as they are kept in Europe but are flowing out of the European economies in crisis and moving onto stonger economies. EU should find ways to keep these savings in the troubled Countries, and manage the Maastricht Treaty in a more flexible way.

- Although increasing deficit may further damage the troubled economies, there is broad consensus that a too high speed in implementing austerity is boosting the current recession: there is no simple recipe, however, austerity mitigation is urgently needed.

- Major issues Europe is facing: fiscal austerity; Euro's strenght; credit crunch; unemployment; political uncertainty. A number of actions at macro-economical level would be required, e.g., in order to boost export, one of the way-out would be to leverage a weaker currency.

- New growth drivers are emerging, but require investments: knowledge based capital; greener economies; value-added trading.

- Shadow wars and cyberwars are ongoing, with increasing geopolitical risks.

Although the recent Cyprus crisis has been managed in a questionable way, it is clear to me that it is radically different from the one of most of the European Countries and as such should be managed differently.

However, I frankly haven't perceived any signs, yet, that a different course of action is about to be implemented for the other European Countries… let's just hope they won't come when it may be too late.

 

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