On the financial crisis

It has been long time since I last wrote about the financial crisis and that could make somebody think that all the big mess is over. Wrong assumption. In the last days, we have witnessed some movements in the financial crisis, which are taking the situation close to the darkest days of 2008, when Lehman collapsed bringing the whole financial system close to collapse as well. Differently to 2008, the core of the crisis is situated now on the European Union. But let's put some thoughts together in relation to the most recent chapters of this novel.

The largest and most urgent problem now is the solvency of Greece and, by extension, the survival of the euro (the second currency in the world after the dollar). Regarding the Greek tragedy, there are critic opinions from some countries (let's call them "AAA-countries") which demand tremendous austerity measures in exchange of some financial aid, with interests beyond 5% (more than aid, I would call this loans). At the same time, Greece must reduce its indebtedness radically in the short-term. In one word, we are asking Greece to achieve the impossible: with such strong austerity measures we are killing the potential growth of the Greek economy and then the Governement cannot get revenues from the taxes and the indebtedness rises and we demand more austerity measures and... It is true that for years Greece was not an example of efficiency and productivity but, on the other hand, they are asked the impossible.
The AAA-countries argue that these austerity measures are some kind of punishment for Greece, which was living on credit beyond its possibilities up to now. The latter is absolutely true but, in my opinion, one should be more pragmatic in this issue. First of all, almost everybody agree with the fact that Greece should never have entered into the euro area, because it did not meet the criteria in Maastricht. Once this mistake is made, there is no point in going around it any more. By the way, these AAA-countries also benefited largely from the inclusion of Greece in the monetary union and their banks were quite eager to enter into businesses in Greece. In a monetary union, what happens to that country has the characteristic of being quickly passed to the other members of the union and that is what European policymakers should look at first. What is at risk is the European Union, not a single country, and the short-sighted solutions defined by European leaders seem not to be fully aware of the situation. It is necessary to flood Greece with money, so that it can meet their commitmments and to make disappear the doubts about some other European countries (Portugal, Ireland, Spain, Italy, Belgium and even France).

Lastly, let me conclude with a short reference to the "competition" between Spain and Italy. Some years ago, on the top of the bubble, Spain overtook Italy in the measure of GDP per capita, what was received with joy in Spain and in Italy with a lot of concerns about the methodology of the data used to measure the GDP per capita. At the beginning of the crisis, it seemed that Spain was the next country after Portugal, but latest developments in the markets have dramatically changed this perception: CDS spreads and spreads with the German Bund are higher in Italy than in Spain, with a tendency to widen this gap. In other words, now it is Italy the next one in the queue. Needless to say, such a situation is simply unacceptable for some Italian colleagues of mine, who are now shocked when they see their country behind Spain. A small victory for us, but victory, je, je, je.