Friday, 14 May 2010

The Coming Fall of €uro

The Market is heaving a sigh of relief over the rescue package announced for Greece. The euro-area governments themselves (so this doesn't include Britain) have pledged €440bn in loans or guarantees. A further €60bn in loans comes from the European Union's budget (includes UK). And there could be as much as €250bn from the IMF (which includes UK, as well as all the American and Canadian taxpayers who might be wondering what did they do to deserve this).
On top of all this, the European Central Bank (ECB) has said, effectively, that it'll step in as a lender of last resort, buying government and corporate bonds where it feels it's necessary. This is not the same as the quantitative easing (i.e. printing money) that the US and Britain have undertaken as it is not financed by printing more currency. The purchases are will be financed by selling for e.g. German bunds.

This deal won't save the euro

“We shall defend the euro whatever it takes,” EU Commissioner Olli Rehn said after the 11-hour meeting (meaning EU taxpayer´ last cent). But in the longer run, this deal is not a solution. And it's not good news for the euro.

All of these moves, assuming they work, do not make for a 'strong' currency. Europe has now decided that "member countries have to jointly put their resources at stake to support the weaker members." In other words, the euro can now only ever be as strong as its weakest member.
And that will be pretty weak. Austerity programmes might be necessary, but they tend to stifle economic growth. Meanwhile, the ECB is likely to have to keep interest rates low for the long term as it shepherds all these weak economies through their hard times. That's not a great recipe for currency strength, the euro will still fall, and any bounce now is a good opportunity to get short.
The trouble for Greece is that there is limited scope to boost growth. And thus it cannot really boost its tax revenues immediately. In particular, as Greece is in the euro area, it cannot devalue in the way that, say, the UK has, to correct the major loss of competitiveness it has suffered in recent years. Of course, devaluation would only partially help Greece. The reality is that Greece, like a number of other smaller European countries, has deep structural problems and probably should not have been allowed into the euro in the first place.

Effectively, it has to deflate its economy. The trouble is that this does not reduce the deficit as much as one might think: cutting spending when the economy is already suffering weakens it further. It is like chasing one’s tail. Moreover, as we are seeing in Greece, this austerity message is not going down well locally, as evidenced by strikes and riots. Thus, the economic crisis is already becoming a political and social crisis.

Greece is in a debt trap. Its debt is greater than the size of its economy, at 126% of GDP, and the interest it pays on its debt is higher than its rate of economic growth. Even with this bailout, its debt-to-GDP ratio is expected to rise, peaking at 149.1% in 2013, according to officials. It might even be worse. Greece may still default. The 'contagion' risk remains.

How big is the problem?

Who are the weak countries? They are called the PIIGS: Portugal, Italy, Ireland, Greece and Spain. Yet Ireland is taking the tough medicine that Greece is resisting, and politically, it does not want to leave the euro. The worries are centred on Spain – a much bigger economy and one that is in trouble, where one in five is unemployed and prospects for growth are minimal, as economic growth before the crisis was driven by a construction boom which is unlikely to return. Let’s take look at the Europe’s web of debt.

[Source: NY Times, May 1, 2010]

The bail-out package is big, but it's not that big: "€750bn is just over one-year's new borrowing by eurozone members and a bit more than 10% of eurozone government debt. So it's certainly not enough if investors were to start losing confidence in the ability of some big countries – such as Spain or Italy – to honour their debts."
Europe has bought some time. The best bet now is for it to look for realistic ways to restructure the debt of troubled eurozone nations, and get ahead of the problem, before the issue rears its ugly head again.

Is monetary union sustainable without the political union?

The arguments are the same now as they were then. Monetary union requires labour mobility and fiscal flexibility in the form of a single Treasury. Rich regions need to bail out poor areas when needed. This is easier to implement if they are part of the same country. It is much harder to justify across a monetary union. Asking hard working German tax payer to pay for the laid back early retired pensioner in Greece is not likely to go down well!

The basic problem with the euro is that one interest rate does not suit all the countries. The economies are so different that they need their own monetary policy and the ability to set interest rates in line with their economic cycle. One size does not fit all. So ahead of the recent financial crisis, the euro contributed to an even bigger boom in the smaller European economies. Hence, they have seen a bigger bust.

All of this demonstrates the fragile underpinnings of the euro area. A monetary union makes sense for Germany and its satellite economies, including France. But the PIIGS need a competitive boost. They need devaluation and structural change. But because they cannot leave, the markets are pushing yields up, creating domestic problems. A bailout does not solve the problem. It just gets us by, with some hope and prayer, until the world economy is stronger and the markets are better able to cope, even if Greece eventually defaults.

The European economic and monetary union (Emu) may need to become a political union to survive. This is one lesson from a historical analysis of monetary union in the 19th and 20th centuries. Monetary unions of large sovereign nations which do not have political union eventually fail, sometimes after a long time.

Monetary unions have succeeded where there has been a political union. The German unification is a good example of this. Monetary unions of small countries can survive without political union, provided there has been economic convergence. Two examples are the Union between Belgium and Luxembourg and the CFA franc zone in West Africa, which have survived..

Once the political system binding it together collapses, the monetary union fails e.g. the collapse of the Soviet system.

The lesson is monetary unions of politically independent, large sovereign nations can fail, particularly when there is an external shock, causing the economic environment to change. It is easier for unions to survive when the economic cycle is favourable.

The Exchange Rate Mechanism (ERM) worked well in its first phase, from 1979-87 because the system was flexible, with 11 frequent realignments. The second phase, between1987-92, appeared to work well. There was only one realignment, when the Italian lira moved to a narrow band. Yet all that happened was that problems built up below the surface. Nominal exchange rates did not change, but real rates moved badly out of line, providing the catalyst for the system’s near collapse in September 1992. Flexibility is important for any currency system.

In Summary

Previous experience of monetary unions in Europe is that they can last for some time, but ultimately Emu must become a political union to survive.

With such diverse socio-cultural, economic and politically independent sovereigns, that may remain a distant dream. Meanwhile, the coming fall of €uro is getting increasingly forceful……this story is beginning to read like the ‘Tower of Babel’.

Sunday, 9 May 2010

How to Stop Relatives Meddling in your Personal Affairs?

Every family has a few of these types, those who stake their right to every bit of information! They are the eager beavers or the frequent busybodies present almost in every family. Many a times these intrusive individuals are not overly concerned because they are altruistic or want to see harmony in the family; it is usually because they are meddlers.
Believe it or not, some relatives get a thrill out of meddling in your personal affairs. This seems to give them some sort of joy for the moment. It can even turn into gossip where the whole family has a gossip line going about, you from Auckland to California.
Don’t get me wrong. Family can be one of life's greatest blessings when they are supportive, understanding and caring. However, there are times, when some of your relatives cross the line of caring to enter the zone of meddling, it is no longer a blessing, it usually feels more like a curse. Your relatives may have an irresistible urge to expound some of their wisdom to "help" your situation. The counsel or advice quickly turns into a meddling in your affairs. So-called concerned relatives may feel the need to dabble into situations in your life that they have nothing to do with; neither do they have any control over it nor any real interest in resolving it albeit get a thrill out of it.
Often people make the mistake of succumbing to the outwardly friendly approach of these busy bodies and succumb to their wily ways for the purpose of being liked. By the time they realize, it is too late as they may have established habits and practices that are not only irritating, but also interfering.
It's a fact in most extended families’, relatives feel they have a right to all information and assume an active central role. The thought is that since you are related, you should share every intimate detail of your life with each other, and give commentary and suggestions. In large families, this takes the form of gossip about other family members providing entertainment value.
But why does this happen? It probably emerges from the early impressions that people form with respect to the members of the family. The early impression we all had in their minds about us boxes us into a stereotype. Some of us were average, some bright, some lucky, some underachievers and some of us were even the black sheep. Whatever the stereotype in your family of origin, chances are that those notions have continued. Meanwhile you might have moved on in life and probably shaping yourself for better things but if that is at odds with those early impressions, it gives enough reasons for them to discredit you.
As you begin to get ahead and show the new you, some of your family members will feel uncomfortable. They will not know how to deal with you, the way you are now, so inevitably, they will try to push you back into the stereotype role you had before or start malicious campaign against you.
Just as in the childhood game of reling messages on an imaginary "Telephone," the story changes as it's passed between family members and ends up as garbled. You, as a member of this family, fall into two categories; you either feel your life is an open book or you choose to have certain aspects of your life private. So what do you do if you fall into the latter category? The more you try to retain your privacy, the harder they will work to pry information from you or gang up to annoy you.
One must set limits with them and its never too late to do this, because the longer they are allowed to interfere, the greater the influence these meddling types will have on your relationships with others. It is important to speak up when asked to do or say something with which you do not agree. Do not sacrifice your opinions or what you know to be right simply for the sake of getting along with your relatives. When they do something you do not like, tell them in a civilized manner what they did and why it upsets you. Try and be conciliatory by explaining what is acceptable, but again, not at the expense of your beliefs or self-esteem. If you have reconnected with any of the family member, be on alert. Old patterns will most likely remain in waiting to thrust you into the same old position.
With this said keep in mind that you have to do what is best for yourself, regardless of how your family may respond. The choice of making a change is something that you are doing for your benefit, and not for anyone else’s harm. You should not feel guilty for doing what is right for you.
To prevent your relatives from meddling in your personal affairs here are a few tips you may want to try:
1. Do not talk too much about your business.
2. Keep your business out of the street.
3. Just say nothing. If someone in your family comes to you meddling. Just tell them you don't wish to talk about it.
4. Tell your kids to keep their tongue. Sometimes conniving relatives will go so far as to ask your children questions about your life. If some of their relatives want to know about you, tell your children to say, "you have to ask my mother or father about that.”
5. Change the conversation. If a family member wants to meddle in your affairs, try changing the subject.
6. Flip the question around on them. Most times people like to meddle in your affairs, but they do not like for you to meddle in their's.
7. Another tactic is to answer their questions with one of your own. When the meddling relative begins to inquire about your personal life in a way that you aren't comfortable with, here is your answer: "Why do you ask?". The question makes them uncomfortable and forces them to assess their true motives, as well.
Lay new ground rules for your relationship, and stick by them, even when it hurts. It will pay off in the long run. Eventually your family will get used to the new you, and learn how to relate to you.
Family is what you are born into, there is no choice about it. Do all that you can to keep these relationships healthy and intact. They are important, but always remember that you are in control of your life and how you choose to live it. Don't allow yourself to be run over or exhausted by meddlesome relatives.
You can put a stop to it, at best by questioning their intent and at worst by severing the relations.
The bottom line is that it is your life. Stopping meddlers takes assertiveness, setting boundaries, and understanding the dynamics. Setting boundaries takes clear communication. Chances are that if you originate from a family that is enmeshed, there is more than one meddler. If you are determined to stop the meddlers, you will need to gain great skills in assertiveness and setting limits.
Ultimately, it is important to realise that the only person you can change is yourself. It is wise not to waste too much time and energy trying to change another person. Simply change the way you deal with them.
Good luck….