Executive Pay: The Curious Case of Carlos Ghosn’s Arrest
February 12, 2025
The “R” word is back in town. Economists and analysts all over the world are now wary about the fact that a major recession may be just around the corner. They have different facts that make them believe that a recession may be about to happen. However, their conclusions are pretty much the same. For […]
Types of Costs The following are the costs associated with the projects. Direct costs Any costs that are directly attributable to the work on the project. These can include the salaries paid to the resources, the billing rate of the resources and costs of the software and hardware that are used for building the website […]
Business Process Improvement project happen to be the most effective tool to bring in effective process and operating efficiencies in any field of business operations. Organizations use BPI programs to overhaul the existing processes, remove redundancies and to adapt to the changing demands and conditions of the Customers. As the business environment keeps changing and […]
From Backwaters to Powerhouses At the start of the 1970s a widely held belief in the United States and in Europe was about how there were no markets outside of their regions. The implication was that the Third World countries were not worthy of foreign investment as they were steeped in backwardness, immersed in poverty, […]
The Rise of Populism and Protectionism The election of President Trump represents the cusp of the current wave of protectionism and populism that emerged in the aftermath of the Global Financial Crisis of 2008. As the Brexit vote and the emergence of populist leaders such as Vladimir Putin in Russia showed, the disaffection and dissatisfaction […]
When the global economic crisis broke out in the autumn of 2008, the impacts were felt around the world. However, it affected the US primarily though countries across the world felt the reverberations to some extent.
When the crisis broke out, Europeans were smug and complacent in the assumption that the crisis would not affect them the way it did the United States and other countries. This assumption soon gave way to disbelief as the first rumblings of the sovereign debt crisis began to be felt in late 2009. The sense of relief at not being hit badly by the global economic crisis soon gave way to panic among the various capitals of the Eurozone member countries.
When Greece became the first casualty of the crisis, Spain and Italy insisted that they are “not Greece” and hence, they would not be affected by the crisis.
When Spain and Italy began to feel the heat, other Eurozone countries insisted that they are not Spain or they are not Italy and hence, they would be spared the sovereign debt crisis. Of course, as events over the last few weeks have revealed, there is no country barring Germany that is left untouched by the Eurozone debt crisis.
The heart of the problem regarding the Eurozone crisis is that the member countries have too much debt and too little growth. As has been mentioned by many economists, manageable debt is a sign of a growing economy. However, when the debt is unsustainable and reaches alarming levels as a percentage of the GDP (Gross Domestic Product) then no amount of quantitative easing or “printing money” in nonprofessional terms can help the countries.
For instance, all the PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain) have debt as a percentage over GDP well above 200%. Hence, either they produce miraculous growth that would help them repay the debt or undertake severe austerity, which they are doing now on the insistence of the European Central Bank, the International Monetary Fund, and the World Bank. This has led to extreme hardships being inflicted upon the common people with the result that protests and strikes have become the order of the day in these countries.
The point here is that like so many western countries, the Eurozone countries lived beyond their means during the boom years and now they are reaping the worst fruit of having to toil for repaying the debt.
Of course, the European policymakers proclaim that they have solved the crisis by extending loans and bailing out the troubled countries in the Eurozone. However, more debt is not the answer to debt and unless the issue is tackled by having common fiscal policies across the Eurozone or these PIIGS countries defaulting on their debt, no amount of Central Bank Intervention is going to help.
Considering the fact that the unemployment among the youth in these countries is above 30 percent, it is anybody’s guess as to who would pay the debt back to the lenders.
As happens with individuals who have lived beyond their means and have to contend with rising EMIs (Equated Monthly Installments) and have no choice but to default on their obligations, the European countries have no other option left but to break away from the Eurozone and return to their respective currencies. Though this option would entail some pain initially and calls for more sacrifices over the medium term, this is the best bet in the longer run for all stakeholders.
Finally, the stakes are high for the Eurozone as any default by the member countries needs to be managed and the outcome must not be a disorderly default but one where the impact to the entire global economy is minimized and the responses structured. This happened in March 2012 when the lenders of Greece were asked to forego a portion of their loans. However, in subsequent months, we have had more bickering among the European countries instead of consensus on what needs to be done.
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