Fiscal Unification of Euro

The concept of Euro bond was never discussed because never was the difference between Monetary union and Fiscal union so amplified. The way Euro zone was created and members were added, this was already waiting to happen. This discussion could have been triggered in the past, but it was waiting for the recession and debt crisis. Good times always discount warnings. Euro Zone consists of economically dissimilar countries. Consider this; In 2010 GDP of Germany was 2.5 trillion USD, while another Euro member Estonia’s GDP was 14 billion. In 2005, GDP growth of Ireland was 5.3%, while Germany’s GDP growth was 0.8%. To think that with such economic disparity - leading to varied fiscal policies - there could still be a ‘Monetary’ union was always a crisis waiting to happen.

Now when this crisis has come to fore, this is the opportune time has to achieve that fiscal union. Euro bond is that Fiscal union. Just like Ireland could not cool its economy by raising the interest rate of Euro because Germany needed growth, similarly Germany, and France can’t turn away from Greece now. That is if Euro zone has to survive in the present form. If there could be a fiscal union, then there will be truly one Euro, with the member states having co-relating economies. Growth in one would help slowdown in other and crises in one member state will have lesser effect on health of Euro.

Today Greece is being blamed for not shoring up its economy. Even after the first bail out capital and tough austerity measure, there hasn’t been much change in the economy, nor is it predicted to be. Euro is also to be blamed for this. Greece can’t become competitive because it can’t devalue Euro! The strongest evidence in support of this argument comes from the situation of another European country that was not part of Euro zone. We should not forget Iceland, which has gone out of news sheet. The reason Iceland could fend for itself and in few years will be back in shape was only because it could devalue its currency. This can’t be said about Ireland which is still languishing or about Greece.

If Greece can’t change Euro, then Euro zone should change itself to accommodate Greece or let Greece go out of this monetary union. I would be pleasantly surprised if we could have any other resolution to the present debt crisis. It is as much a test of political resoluteness now.

September 15 - Lehman going under !

September could have done without one more dreadful milestone, but there is no way to plan these milestones. 15th September saw carnage of a different kind from the one September has become to be associated with since 2001. It all started Lehman Brothers, the venerable, 150 years organization going bust. This particular day was writing on the wall for global recession. Though it wasn’t the start or immediate cause of the recession, but it was more like an anchor. Freddie Mac and Fannie Mae were saved just a few days before, days later Merrill Lynch got sold and AIG had to be rescued.

The importance of September 15th lies in the fact that only after Lehman Brothers did everyone got the jolt and accepted the global recession. There were ramblings of recession in US, the housing bubble burst and credit crunch, but it was all thought to be an American thing. In Europe particularly, people didn’t see it coming, and it came much like a Tsunami wave. I don’t think anyone seriously thought of recession in Europe not even by the time they went for their summer vacation. The only small murmurs were of real estate bubbles in UK and Spain, and to a lesser extent of overheating of the economy of the ‘tiger’ economies of Baltic Rim (Estonia, Latvia, and Lithuania). It came fast and hit hard. There was no time to get prepared and everyone got washed away.

Standing at where we are today, it is hard to believe those days. Every morning would have the gloomy news stories of bankruptcies, lost jobs, crumbling stock indexes and shrinking order books. Recession was everywhere and for everyone. There were no more queues for taxis, one could see more people taking metros and commuting by public transport, popularity of private label products in store, etc. I am sure each one of us could still picture those days. They are still not so far in distant memory.

Today most of the big economies are ‘technically’ out of recession, and in the top management of most organizations (C level) the psychological green sprouts are all too visible. This is also the moment to revive the debate if it was wise to let Lehman go bust? I doubt even today if there would be a single answer, but in my personal opinion it served the larger good. Lehman going under spurred the measures to bring the world out of recession. It also cleared any doubt of global recession, or if this recession was only for US and other developed economies. From that perspective, it does feel right to let it go bust. Ofcourse, there is never going to be any good for those who lost their job and investments with Lehman.

It will be few more quarters when all the economies would come out of recession and job losses are stopped. Concerted efforts and personal attention by top politicians and their government have yielded results. Although now there is a risk of politically popular issues getting prominence, which might not have been the main reason for recession, nor might be a great help in bring the world out of it. Personally, I feel there were two main reasons for this recession and they should never be allowed again.
- Housing bubble, and for that matter, no bubble should never be allowed to form
- No country should have huge trade surplus and concomitantly no single country should have be running trade deficit. This situation becomes worse, when there is a single global reserve currency (USD)

Lessons are being learnt from this recession and even though there would be more global recessions, hopefully the reasons would not be the same.

Main Street or Wall Street ?

Almost a day later, things are looking a bit better. The angst and frustrations are bit modified on seeing the ‘greens’. None the less it was unbelievable – a deal which took a week to be accepted by two political parties fell by 12 votes! I can’t seem to understand who stood defeated, the political managers or the bill?

The worst outcome of the whole process is the debate on Main Street and Wall Street. There can’t be an inopportune time to discuss this topic than at this juncture. Why is it a problem of Wall Street? Does not the main street lead to Wall Street or may be Wall Street is on an island?

I agree firms and associated eco-system took a little more than necessary risk, there were maybe little less regulation, lure of lucre, but did these lead to the fall? Let me try to put this in simplest way possible. The Wall Street went down because they had too much confidence on Main Street. After using all of the Financial Engineering, they carved out, bundled few other assortments and created instruments called Credit Default Swaps(CDS). Guess what, these CDS are derivatives, which inherently mean they derive their value from underlying asset, and in this case the asset was those mortgages. Those mortgages, which people from Main Street took, without giving a damn, because they were cheap! Yes, because they were cheap and the government had totally incentivized the whole borrowing process. The CDS went bust because those living on Main Street didn’t pay back their mortgages. Consider an analogy. If all of us have car accidents and the insurance company goes bust, then we will blame insurance company for taking risk. But remember the insurance company is dependent on a fact that not all of us will have car accidents.

Further, this whole thing is not about Wall Street and Main Street. If our neighbor’s big house, which we envied when they bought, faces foreclosure then this whole phenomenon, is also bringing down the price of our own house as well. The credit crisis not only hurt Bear Sterns, or Merrill Lynch but is also hurting the small mom and pop stores. It not only brings down the stock price of Goldman Sachs and Lehman Brothers, but also the value of Microsoft shares, in which many of us have invested for our retirement.

Let’s not make the whole thing trivial by putting this as Wall Street problem or end of capitalism or win for Socialism or vindication of Asian economies. There is a serious problem and everyone should work towards addressing the situation. Admittedly, there have been mistakes, not enough regulations, too many incentives for cheap loans, etc. Let’s debate about how to improve things and invigorate the economy once again.

Indian budget 2008-09 analysis

On 29th February, Indian Finance Minister Mr P. Chidambaram presented the fifth and the last budget of the present government. It has been a trend in India to give a tone to every budget. On this context, only the first and last budget of this government can be given theme. The last three budget of Chidambram didn’t fit any template. I feel Chidambaram is only one of the two FMs around this time, who really deserved the job. Inspite of this, I disagree with many of his policies. (Moment of truth: It seems my disagreements are more sincere than agreements).

The limitations of coalition government and the imperative of next election very clearly reflect on the policies of these budgets. This budget has been all for spending on social sectors – education, health, employment, etc.

The biggest of the policies was the farm loan waiver of the magnitude never ever made before in India. I don’t think it is going to help Indian growth story in any manner. In the current five year plan, agriculture growth rate is envisaged to be 4.1% but it never ever reached that mark. It has been languishing between 2 to 3%. It needed huge investment for technology, industry participation, processing, etc, but where did the money go ? It went for waiving the debts of the famers. Agreed, suicide of deb-ridden farmers had increased but these are not the farmers who borrow from banks. They borrow from money lenders and their debts are not waived. This generosity of Finance Minister is not going to benefit anyone in long run except encouraging farmers to keep defaulting on loans.

Secondly he increased investment in health, education, employment, social security. I have been reiteration that investment or putting the money is not the problem. The malaise is the corruption that siphons the money even before it reaches for whom it was intended. So some strong policies were needed in the implementation part, in the micro management. Sadly no government ever thinks in this direction. There has been a slight mention in this regard about two states agreeing to use technology but nothing more than that. All the money provisioned for the benefit of common man is never going to reach them.

The changes on taxation front were cleverly timed for this year. Despite the surge in income tax collection there was no major benefit given to tax payers all these years. It was overdue and it is good. On the other hand the short term capital gan tax rate was increased. The majority of those who pay this tax are the stock market community and it is not going to go well with them. Our communist parties see this class as ‘Bourgeoisie’ as such they had to be taxed. Also I don’t understand the cess on tax concept. Provision of cess is like giving extra life to schemes which can’t utlilise the money already apportioned to them. It actually encourages poor micro management. If more money for education is needed, then it could be given from the general spending. Why cess?

The dampner was that nothing was done for the benefit of the export sector. It is currently reeling under the appreciation of Indian currency and yet nothing for them. Likewise, there was no extension of the provision of STPI scheme, which gives tax concessions to the IT companies. Though FM says we still have time to look into it, but I don’t think anything is going to come this way.

To summarise this has been a good political budget, some cheers for middle class, keeping the growth story intact with attempts to limit revenue and fiscal deficit.

Let’s see how the next budget of India would be?