European debt crisis and its consequences

The European debt crisis started in Greece and spread to Ireland, Iceland and Portugal and moved to most of the European countries in the monetary union. Along with its huge welfare programmes and bureaucracy in administration and tax collection lead to large revenue leaks, government also borrowed heavily for the Athens Olympics games. This was the starting point for Greece debt crisis. Today, even big European economies like France and Italy are in serious debt problem.

The main cause for the debt crisis is heavy spending without having equal revenue by the European states. Though the problem looks only due to huge welfare programmes and unnecessary government spending, the underlying cause is the loosing competitiveness. This has created low production and low economic activities which has increased the unemployment and reduced the government revenue. This is the main problem in most of the European countries that are facing debt crisis today.

The problem in Ireland is quite different from other nations in Europe. Ireland has enough surpluses and its national economy was handled far well than many other European countries. The unscrupulous lending by the banks led the Irish government to support those financial institutions and had to face itself the debt crisis.

The impact on the European debt crisis is not only going to affect the European monetary countries but the entire Europe and thereby pull the world economy into recession. This is what is actually happening now. The debt crisis in all these smaller European countries has to be borne by the European Union and its bigger partner Germany. This makes the majority of Germans to think for dismantle of the Union and become independent with its own national economic policies. Germans feel why they should sacrifice for other nation’s mismanagement of economy.

The European Union has to lend money and make these countries financially stable by printing money. This creates inflation in countries which are doing strong in their economy. The value of Euro will eventually go down creating high inflation in few countries and few countries which are still in recovery stage will find the value still high.

How can there by sustainability of a currency when group of countries have same currency and follow totally different economic policies with different political and social conditions. The currency impact will be different and it will be very hard for the Euro to sustain in its present economic and political situations. Problem in one member nation will affect the currency and all other nations have to bear the burden of that nation.

Compounded with the European debt crisis the world economy has to face the American financial crisis together at the same moment. To balance these developed nations’s crisis, Asia and other developing countries have to grow faster to keep the world economy not to fall into recession again within couple of years.

With knowing the current European debt crisis situation one has to find how these nations can and the European Union can do to come out from the current situation. It looks simple and said by many to increase the revenue of these nations and reduce the government expenses. If it is so easy then by now the European Union should have come out of its crisis as the debt crisis started more than 3 years ago.

Euro is the main problem for all the countries in European Union, because the countries with debt crisis have to devalue their currency for increasing their competitiveness in the world market. Instead for stronger nations the Euro should be stronger otherwise it creates unnecessary inflation and flow of money. Striking a balance in value is really hard to do than said.

The steps that could be taken by the individual European nations.

1. Reduce the welfare programmes according to the intensity of the financial burden each nation has. Already many steps have been taken by member nations including Greece, Italy, Portugal and others. Even Britain has taken strong measures in reducing the welfare programmes. The main point to be noted in the curtailing measures is it should not normally hurt the common people. It should minimum be structured in the way that the poor section of the society is least affected, otherwise there is chance for revolt and fighting against the government as it happened in Britain recently and France earlier.

2. Control the administrative expenses and other big expenses in defence, sports and entertainment events and such unnecessary expenses for the normal running of the government and society. Reduce the government headcount and also reduce the salary for high earners in the government.

3. Increase the competitiveness of the nation. Most of the developed nations and particularly European nations except like Germany have lost their competitiveness seriously against the developing nations like China and Korea. Since they have Euro with high value, its countries find it really difficult to survive economically. In the long run they have to strive hard to increase their competitiveness in the area they have competitive advantage. The spending in education and research and development has to steadily increase according to the international level for creating more skilled labour force.

4. All the leaks in collection of revenue have to be sealed. Serious steps have to be taken in this area to ensure there is adequate and budgeted revenue is collected. European nations already have one of the highest taxes in the world. So it doesn’t make sense to increase the tax further which may create avoidance of tax, so it is important to increase the tax base. Many individual entrepreneurs and small businesses both in the industry and service sector avoid the tax and these people have to be brought into the tax net.

5. Bureaucratic delays and obstacles in issuing business licences and other administrative corruptive practices have to be totally stopped so that new businesses are set up easily and incoming investment both domestic and foreign is encouraged.

6. Most of the public sector enterprises and assets should be tried to disinvest to private sector for better and efficient management. This will also bring much wanted funds for clearing the debts instead of borrowing them for interest.

All these actions have to be seriously implemented along with proper economic and financial policies to boost the economy. The structural programme created in accordance with the European Union and IMF has to be properly implemented. As said, Euro is big deterrent in devaluing the currency of these debt-affected nations. Their economies with many economic problem doesn’t support the currency value they have now. The currency has to be depreciated and devalued, but with uniform currency how is it possible. It is better for The European countries to have their own national currencies than a uniform currency such as Euro. The current mechanism adapted by the European Monetary union is not sufficient to keep the books of individual member nations in balance. A separate analysis has to be made on whether euro is sustainable in long run without affecting the member nation economies and the entire EU.

When all the policies and ideas are seriously implemented there should be hope for the European nations to come out faster from the debt crisis and eventually become stronger than ever before.