- This topic has 12 replies, 4 voices, and was last updated 12 years ago by
.
- Posts
What are the effects of change in recovery strategy from austerity to growth by EU on bank and non financial business? It would help if you explain the significant points or direct to articles explaining the topic.Thanks
Although this article is Australian (!) it is actually quite good 🙂
https://theconversation.edu.au/austerity-and-growth-trying-to-make-sense-of-a-contradiction-7728Its relevant to the global banking crisis – especially the US – not just the Euro crisis which has now become very much a sovereign debt crisis.
It is simply not fair to ask 13 questions like this.
Other people are wanting help as well, and my answers are there to help everyone.
Please post the most important of your questions as separate topics so that everyone can get the benefit of the answers, and I will then try to answer them.
Sir, Now only left five queries, kindly answer as much as you can, as very hard to get understanding from reading financial press.
1.Austerity measures means cut spending, then reduce investment and return. Less return means less fund available to pay debt. But why does Germany want Greece to do that?
2.Can currency devaluation improve balance of payment? Why can’t printing euro solve debt crisis problem?
3.What are the different roles of austerity measures and currency devaluation in resolving debt crisis, pls? Why does
Germany prefer the former one?4.Do Greece default and Greece departure from Euro mean the same? What is the effect for Greece default, pls?
5.Can euro crisis affect US, and other region of the world? If yes, how can it affect, pls?
Thank you.
- Topics: 0
- Replies: 12
- ☆
703,
1. Austerity measures intell;
Reduced spending for public sector,sometimes increase taxes so the deficit by Govt reduced by paying debt.2. Currency devaluation will mean the imports will increase and the exporters will be encouraged,meaning balance of payment is improved positively.
3. In the Euro, if for example if Greece devalues its currency, which it cant, it will mean more exports which improves its liquidity by exproting more.
Austerity measures solves debt crises by cutting government spending aand taking the money to pay debts.4. Greece default means failing to pay debts, the EuroZone cant accept this, therefore it gets out of the zone which means Greece departure.
5….my boss has called me for meeting..will be back
Less spending, more tax, and more job cutting mean Greece will go into recession, and even harder to repay debts. Who has the power to devalue €? Even if devalue €, there are so european countries, who can benefit from exporting? If Greece departures from euro zone, is it the final solution?
- Topics: 0
- Replies: 12
- ☆
Not necessarily going into recession,if Greece is seen as commiting to pay its debt, then it can be allowed to borrow again,or postpone its interest payment, Greece has a liquidity problem more than a solvency issue.Banks cant lend to each other nor to businesses and individuals…Cash is har to come by even for the govt.The country is in trouble.
Greece will benefit more from export by gaining forex ,Almost impossible to do currently,if greece departs,then it can devalue but it will be bad for the Euro’s repuation and for Greece if it defaults(Economical Sanctions are better than Austeruty measures i suppose).Cant borrow in the Eurobanks. like Argentina and Russia.
1 mtby’s answer is correct.
However the problem is that is public spending is reduced, workers in the public sector get less pay (or are unemployed) and therefore they have less money to spend. This means the state receives less tax from them and then has less money to spend! That is the problem and why other people say there should not be austerity but that growth should be encouraged.2 I think mktb had a typing error. If a country devalues its currency then imports decrease (because they cost more). The rest of his answer is correct.
The reason that Greece (or any Euro country) cannot devalue the Euro is that the Euro has a floating exchange rate. The exchange rate against other currencies is fixed by market forces. A country can only devalue its currency if there is a fixed exchange rate to devalue.
If Greece leaves the Euro (which it will not – the press like to make it exciting, but it will not happen. The US has a higher percent of debt as against GDP than Greece!!), then it would not be the final solution because then there would be pressure on other Euro countries having problems (Spain, Italy, and today maybe France). Greece will not leave – it would hurt Greece and it would hurt other countries in the Euro.
The Greek government has been spending more on public services than it has been earning in taxes. They hid the problem before by cheating on the numbers, but it finally got too bad.
Therefore they have to have austerity – they have to cut spending and raise more taxes. Once they have proved that they are doing that (which they now have done) then the rest of the EU will make sure they refinance Greek borrowings when repayment falls due, and then we will finally start getting growth.
This time it will be growth for real and not cheating with the numbers.(Argentina was a classic example of the failure of austerity. The IMF imposed austerity on Argentina which is now accepted by all as being a complete disaster.)
Spain in particular is a different problem than Greece, In Greece the problem was caused by the government spending more than it was receiving in taxes.
In Spain that was not the problem What happened was the interest rates in Euro countries became very low (mainly because Germany – the biggest country economically – was so ‘safe’ that risk was low, therefore interest rates low, and this therefore occurred through the Euro countries).
As a result, private companies and individuals borrowed more and more – particularly to finance buying and building property. Property prices became ridiculously high – a bubble – and when it eventually collapsed as it was bound to, companies went bankrupt, people were put out of work, people therefore spent less , the government got less tax and had to pay more benefits. Therefore a problem!Some countries do ‘print money’. The UK and the US have both had ‘quantitative easing’. That is not actually printing money as such, but they have been buying bonds from banks. This gives more money to the banks so that they can lend more. If they lend more and more companies borrow and invest and expand, then we should get growth.That is the idea behind it. (A problem has been that companies have not been borrowing and therefore there has not been expansion and growth.)
There is a debate as to whether or not it has worked. Certainly there is not much growth still in the US or the UK. So some people say it has not worked. Others say that had it not happened, then things would be worse than they are now and so it has been good.
There is no way of knowing for certain whether it has been a good idea or a bad idea.Countries borrowing money is normal (in western economies).
They have always borrrowed, and when repayment is due they borrow again to be able to repay the existing borrowing.
The problem is that when lenders are worried about the country then they start charging higher interest rates. It is when Greece (for example) needs to borrow to repay existing borrowing that the problem hits – if the interest rate charged on the new borrowing is too high, then the country cannot afford to pay it. Thats when they need help from the troika (the European Central Bank, the European Commission, and the IMF).
- You must be logged in to reply to this topic.