Wednesday, November 23, 2011

Crisis in Europe

There is a fire in our basement! Should we put it out or just sit back and hope that it fizzles out by itself...? Unfortunately there is a large can of gasoline in the basement that we forgot about - a highley concentrated supply of fuel that will explode and take everything down with it if we aren't brave enough to go down there and stamp it out before it spreads.

Should we just sit back and "hope" that the fire won't spread, or should we get off our rear-ends and go down there and put it out?

Unfortunately, everyone can agree that politicians in general will only act when the house is half-way burnt to the ground. The leaders and people of Europe must make some extremely difficult decisions, and they have to do it NOW. The longer they wait, the more costly the problem will become.

However, without going into all of the details and history as to how and why Europe has gotten to this point - I will explain some of the solutions being proposed in a general sense.

First, there is a tug of war going on between the fiscally responsible nations such as Germany - and the fiscally irresponsible nations of Italy and Greece. The Germans do not wish to bail out the fiscally irresponsible countries because they do not feel that it is fair to essentially pay for their sloth and bloated government spending programs when they have been so frugal and efficient with their own spending, etc.

One of the solutions being proposed is having the European Central Bank buy the faltering debt of Greece and Italy in order to keep borrowing rates artificially capped at levels that will allow them to refinance their debts that are coming due in the future. This is thought to be a way to stop the spread of the contagion of rising rates. There is a point to which the rise of borrowing costs for these countries will become so burdensome that they will be forced to default on their debts. Greece has already essentially defaulted on their debts, which has caused many trickle effects - but not as severe as the possible chaos that an Italian default would pose.

Italy's debt is approximately 6 times that of Greece's at $2.6 trillion (which is a sum of which the European Union can not bail out on their own). If Greece can cause as many problems as it has in financial markets, a default by Italy could be the beginning of a financial armageddon - as it spreads to the rest of the European countries (and then the rest of the world).

Another solution being proposed is to simply let the chips fall where they may by not taking any action.

Yet another solution being thrown around is to have the European countries create a single "Euro-Bond" that would consolidate the debts and rates into one security. This would be much like the Euro currency. This is the path that I believe is the best option. That is not to say it is a perfect answer to the crisis, but it is likely to be the only way that the contagion can be stopped in the short-run and begin the long road to recovery.

In addition to the issuing of "Euro-Bonds", there must be widespread economic reforms in the Euro Zone countries. Politicians talk of two ways to solve the budget problems they face (not enough tax revenues and too much spending). The problem is that by raising taxes, the economy will flounder and therefore make tax revenues decline. If the governments drastically cut spending, then the economy will falter as well because government workers will lose their jobs - companies will lose government contracts, which will cause a decline in tax revenues.

So it seems that Europe is in quite a conundrum here. What you will not hear as a solution (at least not as much as it should be being discussed) are ways to grow the economies of Europe and hence - tax revenues thereby lowering the deficits that caused all this mess. Politicians are scared to cut taxes, as they feel that would lower revenues (which has some merit). It is my humble opinion that they should start by making the act of doing business there much more attractive by drastically reducing regulations (both environmental and business). I am a conservative who is extremely concerned about the environment and how businesses act ethically (shocking, huh?). However, drastic times call for drastic measures. This solution wouldn't cost any material amount in tax revenues and would lower spending naturally as fewer guard dogs are needed. I do not believe that loosening these regulations should be a permanent endeavor, rather a temporary adjustment for a tentative time to encourage businesses to grow and hire more employees - thereby helping to reverse the spiral Europe is in.

There could also be some tax reforms done locally by the governments as they see fit. I also agree that there should be spending cuts in areas that are redundant and wasteful. However, I believe that Europe will experience it's greatest bang for the buck (or Euro) by dramatically reducing regulations across the board. I do not see any other way out of this, and would love to hear your opinions on this monumental matter.