The global economy is in danger once again. Europe is engulfed by a debt crisis that threatens the existence of its common currency the Euro and America is now on the cusp of its first debt default triggering alarm bells for governments around the world. For the first time in history the twin pillars of the global economy America and Europe seem to dither on the brink and there is talk of China and India leading the new world thereby eclipsing the West’s long held sway on the global economic map.
EUROPEAN PROBLEM
The debt crisis began with Greece then Ireland followed by Portugal and Spain and is now standing at the doors of Italy (Euro Zone’s third biggest economy). Italy has the biggest sovereign-debt market in Europe and the third-biggest in the world. It has €1.9 trillion ($2.6 trillion) of sovereign debt outstanding, 120% of its GDP, three times as much as Greece, Ireland and Portugal combined. Default would have disastrous consequences for the euro and the world economy. Europe has two contradictory goals. To avoid a formal default on Greek debt while also avoiding an unconditional bailout by the rich (read Germany) of the insolvent south. Also there is great confusion as to how to tackle the crisis: whether through a write-down (via creditors), through austerity measures (via debtors) or via the Germans (through transfers to the South).
GREECE: A CASE STUDY
The Greek economy was one of the fastest growing in the Euro Zone during the 2000s; from 2000 to 2007 it grew at an annual rate of 4.2% as foreign capital flooded the country. A strong economy and falling bond yields allowed the government of Greece to run large structural deficits to finance public sector jobs, pensions, and other social benefits. Since 1993 debt to GDP has remained above 100%. Initially currency devaluation helped finance the borrowing. After the introduction of the euro in Jan 2001, Greece was initially able to borrow due to the lower interest rates government bonds could command. The late-2000s financial crisis that began in 2007 had a particularly large effect on Greece. Two of the country’s largest industries are tourism and shipping, and both were badly affected by the downturn with revenues falling 15% in 2009. Also, Greece joined the euro, thus raising some new difficulties.
To keep within the monetary union guidelines, the government of Greece has been found to have consistently and deliberately misreported the country’s official economic statistics. In the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing. The purpose of these deals made by several subsequent Greek governments was to enable them to continue their custom of spending beyond their means, while hiding the actual deficit from the EU overseers. The emphasis on the Greek case has tended to overshadow similar serious irregularities, usage of derivatives and “massaging” of statistics (to cope with monetary union guidelines) that have also been observed in cases of other EU countries; however Greece was seen as probably the worst case.
AMERICAN PROBLEM
The American government is in danger of defaulting after August 2 unless Congress raises the federal debt ceiling so that it can keep borrowing enough to pay its bills. The US government currently runs a $1.5tn budget deficit, requiring it to issue debt in the form of treasury bills, bonds and other securities.
Public debt was $14.3tn on 31 May, up from $10.6tn when Obama took office in January 2009. Most is held by the public, with the rest held in US government accounts. Congress has voted to raise the US debt limit 10 times since 2001. Standard & Poor’s became the second of the major credit rating agencies to place US debt under review, citing an increasing risk of a payment default. Another ratings agency, Moody’s, warned a day earlier that it might cut Washington’s triple-A debt rating.
Meanwhile Congress is locked over how to tackle the crisis. Democrats want to avoid spending- cuts on benefits and welfare schemes while the Republicans abhor the prospect of raising taxes on the rich and the wealthy. The American president says that Republicans have a unique opportunity to do something big and stabilise the economy for decades to come, adding that a failure to raise the debt ceiling would mean effectively a tax increase for everybody. To quote Obama: “let’s at least avert Armageddon”.
ROOT CAUSES
To assign reasons such as profligacy, living beyond one’s means and bad planning to the greatest fiscal crisis in the Western world is being naïve at best and hypocritical at worst. The malaise is much greater and the rot much deeper than we think and imagine. The first and fundamental reason for this crisis is the utter disregard to the Divine guidance found in the Holy Scriptures and the teachings of the noble Prophets (peace be to them). Confining God to the spiritual world and debarring Him from public affairs has proved to the bane of contemporary society with calamitous consequences. Man-made theories and practices would never be able to withstand the test of time and also unable to cope up with the contradictory demands of different sections of society. Then there is also the danger of a clever and ingenious group of people dominating the state of affairs and donning the mantle of leadership resulting in unmitigated oppression and despair for the rest. Some have realised that the path of greed and hedonism will not yield dividends and it should be back to the basics. The basics is Islam.