Icarus
in Greek mythology, the son of Daedalus attempted to escape from ‘Crete’ by means of wings that his father constructed
from feathers and wax. He was instructed not to fly too close to the sun or sea
since sun heat will melt wax or closeness to sea will wet feathers making it
heavier and will not be able to fly. Icarus ignored instructions and soared
through the sky, but in the process he came too close to the sun, which melted
the wax. Icarus kept flapping his wings but soon realized that he had no
feathers left and that he was only flapping his bare arms, and so Icarus fell
into the sea.
Fortunately it was a mythological tale which does not need to be true;
on the other hand if we see the current situation in European Union we see an
uncanny similarity. Two of the original core objectives of the European
Economic Community were 1) the development of a common market, subsequently
renamed the single market and 2) a custom union between its member states. However, the monetary
union with such a economically diverse set of countries took the concept too
far, I do not think even Mr. Monnet (founding father of European Unity) might
have expected it to happen so fast. Single currency brought down the risk
premium (spread over bund paid by peripheral countries), just before the
financial crisis Greece was paying almost same rate of interest as Germany was even
though Greece was in default for half of last 180 years. Magically, common
currency mitigated the Greece credit risk and brought yield convergence.
However, like Icarus Greece also became very ambitious and piled up debts and
spent on social benefits far exceeding its means which made it to fall in
European sea.
Marshall Plan not Merkel plan
Now
the focus of European Union is on austerity via fiscal compact plan ignoring
growth, without explaining how it is expected to improve situation in
peripheral countries. How can confidence be restored as the crisis economies
plunge into recession? How can growth be revived when austerity will almost
surely mean a further decrease in aggregate demand, sending output and
employment even lower?. Elections on 6th May have shown voters in France and
Greece have decisively rejected austerity measures. Now we have seen election
after election incumbent losing power or change of guard taking place in Europe
starting with England, Ireland, Spain, Greece, Italy, Portugal France and
innumerable local election lost by Mrs. Merkel’s CDU party.
If
history is a guide then Marshall Plan not Markel plan is needed, under Marshall
plan United States gave
$ 13 bn (US GDP in 1948, $ 258 bn) to help rebuild European economies after the
end of World War II.
Europe
as a whole is not in bad fiscal shape; its debt-to-GDP ratio compares favorably
with that of the United States. There are alternative strategies. Some
countries, like Germany, have room for fiscal maneuver. Using it for investment
would enhance long-term growth, with positive spillovers to the rest of Europe.
European
electorate across the continent has given their verdict that they are not happy
with current situation focusing only on austerity, stifling growth (Greek
economy contracted 20% from its peak just before the financial crisis). They
need a policy in which they are offered growth in the short to medium term and
sustainable fiscal discipline in the long run.
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