Questions on the Crisis

Source: council-tvnewsroom.eu

After observing the outcome of the latest Eurogroup meeting (you may find a commentary on that here and here) and thinking about what led us to where we got not, there are still parts which do not make sense. Things that could have easily been avoided and yet nothing was done to safeguard growth and stability in the EU. The 2 major questions which spring to mind when considering past and present decisions are:

1. Why did European Finance Ministers agree for a nominal haircut of 53.5% on Greek bonds held by private investors?

We can all understand that the European leaders all wanted to find a fast solution for the enormous amount of Greek debt. That time was of the essence and a clear plan was in need. Nevertheless, the fact that Finance Ministers in Cyprus, Spain and other nations who had large exposures to Greek debt failed to oppose such a plan still amazes me. What happened? They did not know what the consequences would be? If most newspapers around Europe knew how much government debt each bank had they how could they have not known? The mathematics of calculating the results are more than straightforward: a 9-year-old could have done them without the use of a calculator. Even if we do accept that the German Finance Minister Wolfgang Schäuble pushed for the deal to go through, given that German banks were large enough to take their losses without causing any problems to the economy, and even if he had support from other Ministers, why did the Southern Ministers not oppose or veto his proposal? There are only 2 rational explanations for this: either Finance Ministers are incompetent and did not think of what the effects would have been, or that they are parts of dark plan to bring the EU to an end. Given that they are now trying to solve the problems they themselves have created we can easily assume that the latter does not hold. So that leaves us with option 1...

2. If the IMF and the EU both know that growth is more important than austerity when trying to cope with a large debt burden, why are they imposing harsh austerity measures on any country who asks for a bail-out?

To quote IMF Chief Economist Olivier Blanchard's Ten Commandments for Fiscal Adjustment in Advanced Economies article, "a one percentage point increase in potential growth—assuming a tax ratio of 40 percent—lowers the debt ratio by 10 percentage points within 5 years and by 30 percentage points within 10 years, if the resulting higher revenues are saved." We can easily assume that if the Chief Economist knows and writes about such an issue, then everybody in the IMF should know this as a fact too. If this is true, and by the way if one studies the aforementioned article more arguments against extreme austerity can be found, then why is the IMF so bent on imposing so harsh measures? Nobody can agree more than me that reforms are needed in all EU-periphery countries; even if they are harsh and difficult to be implemented. Yet, a reform is a much different thing than just slashing pensions and wages. I can understand abolishing most (if not all) of allowances paid by the state to civil servants. I can even understand a reduction in social allowances like unemployment benefits and support allowances due to the fact that state expenses have to be reduced. Yet I cannot see any possible rationale for slashing wages and pensions by large amounts, especially during a crisis period where the state is supposed to help boost consumption and not further reduce it. What makes things even worse is that even though the "Greek experiment" yielded terrible results over the 1.5 years that the Troika has been involved in it, they are pushing the same "reforms" in Cyprus. If Spain and Italy follow, then France and Germany will be next in line, until they finally decide to do as they preach.

The above have been puzzling me for some time now. If any one can assist me in understanding the rationale behind these decisions please do. I, and the rest of Europe will be forever grateful.