bailout! woooo yeah!

Euro 700 billion is the new bailout package announced by European Union to save the Euro area from financial collapse. This is after more then 300 billion had already been pumped into the sinking economies of member states. After the US, its Europe. Japan's already been suffering for decades, so whats next?

Just yesterday I had written a note for our company's annual report that the developed economies, or rather, "developed" economies are still doing the clean up after the 2008 financial crisis brought on by the most powerful economy in the world, and it seems that this circle is destined to go round and round for the foreseeable future, because as I have mentioned many times before, there are many things that are structurally wrong with the economic system they live in, and the lifestyles they maintain.

I have mentioned on my blog quite a few times earlier about the economic report that I had contributed to during my internship, and it focused on the same issue. That was 2009, and now two years later, all these developed economies, read the Americans and the West Europeans, including the Irish, the Greeks, the Portuguese and a few others, are still feeling the heat. That report was written by an investment bank that was actually British and an integral part of this very economic system that I write so acerbically about sometimes, and yet that report really enthused me because of its truthfulness. After all the technical analysis and opinions on where the economies are headed, my MD, the lead author of the report, still finished off on a very fundamental note - that these economies must bring about a fundamental change in their lifestyle of high consumption. Of course, when one is used to living in luxury, and at the cost of the environment and cheap production of the third world, any change in the status quo must come slowly, and hopefully surely.

Coming back to the bailout, the big daddies of the European economy are France and Germany, and I think they reached an agreement on the bailout as recently as last week. Googling for their views on the Greek bailout throws out a lot of mixed views, but even they mostly swing towards the pessimistic side, including this American view of why their (Merkel-Sarkozy) plan for the debt crisis will fail...."miserably".

I Think the one word that was missing for the past many years in the way business was done in say New York, London or Paris or even Tokyo, actually especially Tokyo before they went down, was "fiscal prudence." In fact, countries like India which had a greater control, or rather, financial oversight over their economy were ridiculed regularly for not being "open" enough, something which countries like India still get to hear today. The global watch dog still views India as a market that needs to be opened more for its firms. I wonder when this mindset will change, or rather, I wonder when the scales of the global economies will truly start turning in the third world's direction?

But this is not a third world rant, rather, its a first world rant, so coming back to the impending European debt crisis, the writer that I referenced to in the Forbes link says that Merkel in a way was (I use the word "was" because her agreeing to the bailout goes against her public view of opposing such a bailout) a leader who was financially prudent, and was in favor of banks and institutions who lent indiscriminately or took on too much risks to bear the consequences, or in other words, fold.

“Angela Merkel has consistently opposed the terms of the Greek bailout because she is well aware of the domino effect which could begin after they fully agree to the terms — this making them the guarantor of several irresponsible countries with no ability to pay them back.”

On Friday, Angela Merkel “caved” on her tough stance which involved mandatory participation of the private sector, (banks, financial institutions etc.) and said she would back a “voluntary” participation of banks and financial institutions in the bailout of Greece. This due to the pressure of the threat that it was mandatory that they strengthen the European banking system and support the weaker economies of other European countries to avoid a complete meltdown.

The domino effect that is being talked about in Europe is of course all too real, and will definitely impact the entire world, and take many years to resolve. There are somethings that I am unable to process completely in this chain of thought though. When people talk of situations where the US economy collapses, or defaults, then some say that since the US prints the global currency, its dollar, all it has to do is print more. I am not taking into account the domino effect that it will create on its own, but that's a scenario I have definitely heard from a lot of places. So can the Euro print more Euros to get out of trouble? I don't know, and all the smart bankers and policy makers out there will surely discuss these issues. I am sure in financial economics there will be a margin up to which they will be comfortable with the Euro sliding in such a scenario.

Then at the same time, since the global economy is centered around the US economy more or less, even if they default, so what? I mean does China stop doing business with it? Do they stop selling arms to the rest of the world? So the same should be true for the European Union then. I think the fact that they are not one big economy like the US but a mix of all these economies, big and small, that creates bigger problems and lesser space to bully their way out.

I came across this article by a European politician written before this bailout package was announced, but it seems that even now these nations are not able to come around to accepting the fact that there needs to be a fundamental change in the way they run their economies. He talks of, first, getting Greece out of the mess. Then he talks of strengthening their own financial institutions and policies so this doesn't happen again, and then to encourage savings by strengthening their bond market, and yes, creating a climate of investment and growth.

In my opinion, all these good words that we hear from American and European politicians today are nothing new, but in their hubris and overconfidence, they totally overlooked them because when the going's good, why question the process? Now we have all these people preaching to the rest of the world about good policies and institutions as if its the third world's that been living prodigally, but then, charity begins at home. It'll be interesting to see how Europe gets out of this mess, and I hope they do, but long tough years seem to be ahead for them, and I wish them the best of luck.