Tuesday, January 31, 2012

EURO BURNS MONEY



Money is being burnt. Yes, Europe is about to burn money and that for a decade. In my last article I revealed about the propelling Euro debt payment where it will need around 1 trillion euros to be paid by June 2012.Please click the link below to find the PREVIOUS STORY OF EURO DEBThttp://ianalysis.blogspot.in/2012/01/europe-debt-to-explode.html
In my last article I received a couple of queries where I found the readers are perplexed about the mechanism being implemented by euro to fight out the debt. European commission has formed two mechanisms to deal with falling debt burden. European Financial Stability Fund is the fund which has been built by the 27 members of the Eurozone to fight out the sovereign crisis. On 9th March 2010 the 27 euro nations gave birth to EFSF.EFSF was authorized to borrow upto €440 billion. At present out of this €440 billion only €250 billion have remained available after the Irish and Portuguese bailout being executed .EFSF funding mechanism will be based upon issue bonds or other debt instruments backed by the by guarantees given by the euro area member states in proportion to their share in the paid-up capital of the European Central Bank (ECB).In the below chart the paid up capital details of the member states are given clearly. The amounts are based on the European Central Bank capital key weightings.

 The next vehicle is called European Financial Stability Mechanism. This is an emergency fund which was built based upon the funds raised on the financial markets guaranteed by the European commission by pledging the budget of the Euro nations as collateral. Now pledging the budget of the Euro nations as a collateral means that the extent to which the euro nations will cut down on budgets depending upon that the funds will be paid by EFSM to Member states. Now cut down on budget expenditures will result to prolonged crisis for the Euro nations in terms of GDP growth. Less government spending is going to result prolonged job losses and cut downs, low consumption and less manufacturing to happen. This will further increase the burden of the Euro member states regarding their income generation from taxes and other government avenues. So, where growth of the Euro economy is being foreseen in the near future is the question in demand. Unemployment benefits numbers are going to increase despite of government cut down in the expenditure. Eurozone unemployment has risen to its highest level since the euro single currency was introduced. Seasonally adjusted unemployment among the 17 countries sharing the euro rose to 10.4pc in December. The number of Europeans out of work has risen to 16.5 million people, with another 20,000 people without a job in December from the month before. Unemployment in Spain reached a new high of 22.9pc in November and December. In Greece, joblessness was 19.2pc for October, the latest data available. Unemployment reached 13.6pc in Portugal in the final month of 2011.
 The emerging economies find significant low hope for any revival in the export market of these countries. Low consumption in their own economies will result to reverse flow of goods to other countries. European manufacturing will scout for emerging economies to dump their products. Europe will be able to find out ways to bailout the debt but it will not find the growth. Its asset qualities will be devalued more in coming days resulting huge NPA on the lap of Euro nation. At the same time Dollar will try and trying very hard to replace Euro. Dollar is now being treated more as a safe heaven for investments rather than Euro.  Dollar remains highly popular as the refuge currency of choice. With virtually no yields available with short term Treasuries followed with low yields with medium term to long term Treasuries of US dollar still is the most favored currency and it will continue to be.

 My concerns are about the emerging economies. As an economist I will find domestic policy changes in the emerging economies will derive the growth. Globalization is no longer the growth vehicle for the next decade. If today Indian government comes out with radical policy changes, even if it comes out with the Bills which are waiting in the Parliament for approval, Indian economy will find significant growth and the government will be able to reduce its fiscal deficit gap. Well we all know the above the truth but where we fail to identify is the matter of quest. Indian cannot depend on export growth. We need policies to replace which will replace the Indian import market to domestic production. Domestic capacity expansion and more consumer centric polices will boost up growth. Increasing tax rates will only reduce consumption and hence less manufacturing opportunities .Interest rates, Taxes are old mechanism to find growth in Indian economy.

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