Sudeep's Blog

Disorganized Thoughts in Organized Manner

European Debt Crisis: Now and Then
@neha_ns tweeted an interesting article on BBC News regarding European debt crisis: Here is a link: BBC News: Eurozone crisis explained What does the article say?
  • The European Union, led by Germany is proposing a limit on a nation's borrowing: 3.0% of total GDP
  • In fact, the exact same limit was agreed upon by all Euro nations in 1997, right when Euro was formed
  • Almost all big economies - Germany, Italy, France, even Spain after 2007 constantly violated this limit. Greece manipulated its books to appear as if they were staying within the limit.
  • Yet, German economy is strong, and Spain, even after staying within borrowing limit till 2007 is in trouble
  • The reason being, Spain and Italy had a huge amount of private sector loan, although government debt was under limit.
  • As a result, Spain and Italy, with their debt-earned-money, started heavily importing from Germany. Germany started earning lot of foreign currency and accumulating extra cash.
  • Moreover, in spite of being under heavy debt, Spain and Italy saw a constant increase in labor wages. Germany had a regulated/unionized set of wages. Larger wages imply higher cost. As a result, German exports were more competitive (read cheaper) than Spain or Italy. Italian and Spanish companies could not find any overseas buyers at all!
  • That's all there is! Even though governments regulated their own spending, they did not regulated wages and/or private borrowing in many of the failed European states
Conclusion: Political will and regulated markets are some of the biggest factors in deciding fate of a nation. A strong government willing to check its over spending, wastefulness of its private sector and unregulated increase in costs and wages wins the race in long run. Will India ever learn from Germany?
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