The European Monetary Crisis Explained
The European
Monetary Crisis Explained
July 1st, 2012 JurnalPhobia from
various sources
(ongoing)
This
writing will only give a brief explanation (mainly only my self note) about the
origin (it is believed) of the european monetary crisis across the European
Zones. It also questions whether the single currency brings more advantage than
difficulties.
The
so called, European Monetary crisis problem stems from a
confusion between money for exchanges within a country and money for
international trade.[i]
Greece is not the only country from which the problem arises. Italy, Spain,
Portugal, Ireland and France are following too. There two big perspectives
spread across the international business analyst. First, if problem states
decide to leave Euro single currency and return to their respectively national
currency. Second, of course larger portions expect that problem states do not withdraw
from the euro. Third, there’s possibility that a problem state decides to apply
double currencies, its local one and the euro. Recently, only China has applied
the principle of separation of internal and external currencies which results
much benefit from it.
We still
remember when the European states started to apply single currency. It was in
the 1990’s the major European states decided to have a common currency. They managed
the transition into two stages. First, they start in business transaction in
1999, and then for all citizens in the beginning of January 1st,
2002.[ii]
Greek who joined the Eurozone in 2000 also followed the operations. Greek gave
up her drachmas, local currency, and issued a single currency of Euro.
Afterward, Greek firms and citizens bought goods and services anywhere in the
Eurozone with their euros. Who would have
known that there will be confusion in the future, that is possibly leading to monetary
crisis? Second, the problem rises
from the monetary flows within the country and from those across the borders.
We noted that
the problem rise from Greece. What happened in Greece was, Greece followed
economic policy which consisted in spending more than its revenues (received
taxes). In the past, Greece printed drachmas to make up for its budget
deficits. It amounts to fiscal and monetary policy where tax revenues are
produced with the printing press. Some states believed that this system
promises price stability with other advantages and drawbacks.
Across the
borders: no longer able to make up the deficits. Greek government began to
borrow euros mostly from foreign investors. Big European lenders were happy to
lend Greece because the interest rate was high. Their actions also followed by
the belief that Europe would refund them if Greece failed. (This begins to absurd;
we knew who should be guilty and blamed, didn’t we?). It was also worsened when
private Greek agents borrowed within the country and abroad too.[iii]
Out of the
monetary problems; the single currency enabled citizens and privates to buy
goods and services more easily than previously using drachmas. What happened
was a deep imbalanced trade. Greek was spending too much. Greece paid its imports
with exports with promises and Euro which meant more Euros were flying out of
the Greece. Greece soon was threatened from running out of euros.
The European
Community leaders were responding differently. Angela Merkel opposed extending
Greece further loans and preferred to reschedule the due payment. France,
through Nicholas Sarkozy, favored new loans in euros because France had the
same situation with Greece.
Meanwhile, to
prevent getting worse, and also to reduce the deficits; the Greek government
began to cut salaries of civil servants, pensions of retirees and public
spending (sounds reasonable). As a result, people had less money to buy, shops
had minimum buyers and suffered, the rest numbers of Greek had limited money to
buy their daily expenditures. Loss hit the whole Greek, people, private, and
government.
·
Withdrawal
from Euro Currency
Withdrawal from Euro currency is simply against the early constructions
(idea) of European Union. The opinion against Euro withdrawal comes from the
bankers.
·
Why
they shall not leave Euro?
·
Double
currencies: benefit and loss
·
Possible
Solutions: a temporary payment form?
Andre Carbannes suggests the new form of temporary
payments to facilitate production, exchange, and consumption. This temporary
payment works as a voucher that enables to exchange the Euro currency into
drachmas (or Euro drachmas). This temporary payment can become local money.[iv]
I believe this suggestion needs lots of studies and analyst before it actually
can be applied. What I mean is, it is
not an easy task to issue this temporary payment. The people may not be well
prepared. And even to worst, the temporary payment form has a little confidence
to work as national / local money.
It is believed that Greece will not leave Euros.
Although Greek Government has no longer has Euros, they still have
opportunities to buy Euros back. Greece will only to use a Eurodrachmas for
internal/ domestic payments. Eurodrachmas is closely understood to issue bank
notes as a temporary payment form. All domestic
payments must be made into Eurodrachmas. All foreign contracts will have to
renegotiated and paid in Eurodrachmas.
Another solution is to learn from China. China is the
only country able to separate between internal and external currencies. By
doing that, China has gained more advantages than loss. “It used the dollar for
its foreign trade and the yuan/renminbi for its internal affairs. It applied
the separation principle in its strict version, taking measures to prevent the
yuan/renminbi from becoming an international currency. After 1980, it became
again a strong exporter (as it has been during most of history since Roman
times). Its dollars were employed to import goods and services, to make foreign
direct investments (in Africa for instance) and to buy foreign securities,
mainly US Treasury bonds. Unfortunately these are likely to lose much value,
and it is not a solution for the future.”[v]
I believe that this measure will require deep study before being applied other
countries.
Reviewer note:
I like the way Andre Carbannes shrewdly explains. He mentions
all the possibilities to solve the Euro monetary crisis. He gives a brief
explanation on what triggers the crisis, and it is very easy to understand. I
have been observing and following current news of Euro crisis. From my understanding,
it becomes sophisticated although it basically simple (triggered by a state). How
this crisis then threatens the world economic, Indonesia and the rest of the
world, is hard to believe. You can say it’s almost catasthropic. I myself, don’t
have belief that it will be solved sooner by giving bailouts. I just don’t
believe that loans will secure one states economy or trade. The problem itself
sets in the banks practice, investor, and so called “speculation”. It seems to
me, that those entities are more precious and sovereign that any state in the
world. (RC-JP)
[i] Andre Cabannes 2011, “The European
Monetary crisis explained”, Lapasserelle,
August 2011, revised on February 2012, http://www.lapasserelle.com/billets/greek-crisis.html;
Andre Cabannes is a PhD Stanford University, California, USA
[ii] Andre Cabannes 2011, “Adoption of a
common currency in Europe” in The
European Monetary crisis explained
[iv] Andre Carbannes 2011, “What will
happen next? A local Currency” and “When a local money is already there,
unnoticed”
[v] Andre Carbannes 2011, “The Case of
China”: “China, like every other country on earth (except the United States),
recognizes that the dollar cannot continue to be the world international
currency. A new currency must be created that is not at the same time the
currency of one country. Several solutions are possible. But China strongly
favors a solution via the IMF. Why? Because it wants to get rid of the 3000
billion dollars of securities mostly denominated in dollars it holds (from its
huge trade surplus of the last thirty years - it is likely, if you look around
you, that many garments and other objects come from China), and wants to redeem
them for another more trustful currency. If the international community were to
adopt a new currency managed by a private outfit, it is unlikely that this
outfit would accept the Chinese paper claims on the US and other countries.
These would lose most of their value (they would become "American
bonds", like the French know "Russian bonds"). Whereas if the
IMF were to create a new international currency, more decisively than it did
with the SDRs in 1969, it would issue it to central banks of countries in
exchange for financial assets brought by these countries. And for a while the
IMF would accept the Chinese holdings at a good exchange rate with the new
currency. It is with this objective in mind that China secured the position of
deputy managing director for Mr Zhu Min in July 2011.” I have no knowledge yet
on this matter L
Coba kemarin itu baca postingan ini waktu lagi ngambil Ekonomi Micro, I should get A :D
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