The Way Out of the Debt Crisis in Europe

The news that European Central Bank (ECB), International Monetary Fund (IMF) and the government of Greece are negotiating a new loan package of 110,000,000,000 Euros prompted me to find out what the population of the country is. It happens to be 11,000,000 give or take a few thousands. That puts the package value at 10,000 Euros per citizen, rich and poor, young and old. There are other government debts too which will come due sooner or later. Most families, in Greece just as every where else owe money on their homes, cars, other possessions and credit cards. Most businesses operate on borrowed money too. With every individual and business in debt you would wonder who do they owe to.

It so happens that they owe it to themselves. Some far sighted people have saved for their retirement, emergencies, cars or homes they intend to buy when they have enough money for the deposit and entrusted it to the insurance companies and banks. These institutions then loan this money to other individuals, businesses and governments and earn interest to cover their costs including the losses due to the defaulting few and of course bonuses for the executives. In theory, the system should work fine and it does when the economy is expanding and the value of assets is increasing. Most borrowers make timely payments of the interest and some of the principal and money circulates from those who have more to those who need more. However, when the times are tough, borrowers have lost their jobs or the wages fall behind inflation, a large number of borrowers; individuals, businesses or governments, fail to make the payments. This puts banks and insurance companies in a bind. Leave alone lending to the needy, these financial institutions can’t meet their own commitments to the depositors and lenders. Bank failures loom large, as they did in 2008 and a major crisis is on the horizon. The governments of prosperous countries raise the money from their citizens and save the system, as the United States and Western Europe did. Other less fortunate countries in Europe had to go to the IMF and ECB for aid and they have been struggling since then to come to terms with a dire situation. Their problems have been exacerbated by the net indebtedness to foreigners. The government of Japan carries a huge debt load without serious repercussions because most of it is in Yen and is owed to the citizens of Japan. It is interesting to note that the countries like China and India with strong culture for saving and reluctance to debt did not face this crisis because borrowers and defaulters were relatively few. The debt being local and in the country’s currency also helped.

It is in the interest of prosperous countries to save the economies of their less well off cousins – they need the markets for their products and services. The problems in Greece, Portugal, Ireland and elsewhere will eventually be resolved and the burden of debt on the governments and the individuals will be transferred from one lender in one form to the other in another form. But it will not be reduced to a sustainable level without unacceptable political risk. Therefore, the next crisis will be with us soon unless we, at all levels, develop a culture of conservatively evaluating our means before handing out the credit cards or going to the bank for a line of credit or a mortgage. This means restraining the consumer society and to engender a desire to make do with what we can afford rather than acquire bigger and flashier gizmos to keep up with our group. This has to be done by the businesses as well as the governments who have to limit their services and constrain the borrowings to the lending capacity of their national institutions. The countries currently in trouble joined the European Common Market (ECM) and accepted Euro as the common currency in the false hope that the adoption of the currency of Germany and France would overcome the handicaps of easy going culture and weaker industrial and resource base. It will help if southern European countries now take the drastic step and regain the flexibility in their economic policies by reverting to the independent national currencies which they surrendered either within or outside ECM. There is great reluctance among the governments to do so at this juncture. However, the protests on the streets of Athens, Madrid and Lisbon are gathering momentum and it is only a matter of time before these governments change their stance.

In Memoriam

Ravi Sharma was born with a silver pen in his fingers in 2001 when a letter appeared under his name in Canada’s national newspaper. For next six years more than one hundred of his submissions graced the pages of leading publications of the country. He met his premature, though anticipated, death in 2007 when editors started to question the authenticity of his work and cast doubt on his existence. Ravi’s ashes were recycled along with the manuscripts of his unpublished works.

Much to the chagrin of the editors, his name lives through the works they published.