Since the Eurozone descended into despair in the aftermath of the Global Financial Crisis, Germany has awarded itself the position of chief economic lecturer.
“Any unsustainable growth in cost of living in either Australia or Europe would be followed by a deflationary crash, which would have devastating economic effects.”
This article was featured as part of ESSA’s annual Equilibrium publication.
The EU crisis has been painful for EU citizens and policy-makers alike. However, it’s not necessarily all bad news. With a long-term outlook, it is possible that the Eurozone could be stronger for the crisis. More specifically, the crisis has exposed the need for stricter adherence to Eurozone membership requirements and ongoing policy management focused on maintaining economic growth.
As students from Monash and Melbourne converged on the heart of Clayton campus for the inaugural ESSA Monash versus Melbourne Economics debate, the tension crackling in the air was palpable. For the Melbourne team, losing to the new kids on the block would be an irrevocable stain on their self-perception. For the Monash team, the desire to reign supreme on their turf was a powerful driving force. The topic ‘The Eurozone Project is a Failure’ provided ample scope for intellectual sparring.
In an affirmation of the natural order of things, on Thursday night out at Monash University, the University of Melbourne team (composed of myself, 1st-year student Emad, and the incomparable Prof. Jeff Borland) took out a closely fought debate to determine whether the Eurozone has been a success or a failure. Across both teams there was much spirited debate over economic theory, the optimal design for policymaking interlaced with a great deal of jibing back and forth between two of the country’s most elite universities.
Last year I wrote a few articles discussing the origins of money and how its development arose from the need to have some sort of commonly accepted medium for storing and exchanging value, led by governments who could enforce and guarantee the value of currency. More generally, this is the case for the vast majority of assets as there must be some guarantee of value before a counterparty would be willing to make a trade: a stake in a company for shares, the right to collateral for debt and a government backing for fiat currencies. Rationally it doesn’t make much sense for people to use something without any form of intrinsic value or guarantee as a medium for exchange.
One of my interests is exploring these anomalies in the economy and it just so happens that such a currency has emerged: it is called the BitCoin, a virtual currency which can be created and used by running a program on your average home PC.
This past Tuesday (March 19th), the German-led Eurozone finance ministers and International Monetary Fund (IMF) offered Cyprus a €10 billion bail-out package. The catch is, this plan requires Cyprus to raise approximately €5.8 billion (almost one-third of Cyprus’ GDP) as its share of the bailout, by Monday (March 25th). Cyprus is a small player in the Eurozone, and in a lot of trouble – could the costs of keeping Cyprus in the Eurozone outweigh the benefits?
The lack of the requisite majority in the upper house has left the election outcome uncertain. However it is clear that Bersani’s promise to end the crush of austerity in Italy in order to get the Italian economy back on track has resonated with the Italian voter. Should Bersani emerge as Prime Minister, Italy will be set for a collision course with Germany and the European Central Bank.
It is now July 2012, almost three years since the chain of events that set in motion what is now called the Euro Crisis and surprisingly enough, the world is still waist deep in the middle of it. In my previous article I attempted to diagnose what was causing the breakup and why there was so little action taken, and regardless of whether it was for those reasons, just from looking at the EUR/AUD exchange rate it’s easy to see that the situation has been deteriorating continuously ever since the end of the global financial crisis and despite several attempts to change things, it has not really improved.