Friday, January 27, 2012

The Euro Plus Pact & Possible solutions to the EU crisis:

The Euro Plus Pact: 

****The Euro Plus Pact was adopted in March 2011 under which the countries of the EU make concrete commitments to a list of political reforms intended to improve the fiscal strength and competitiveness of each country.

**** The Euro-Plus Pact has four broad strategic goals along with more specific strategies for addressing these goals. 

The four goals are:
(i) Fostering competitiveness. 
(ii) Fostering employment.
(iii) Contributing to the sustainability of public finances.
(iv) Reinforcing financial stability.

Possible solutions to the EU crisis:

(a) Creation of Common European bond: If a common Euro bond is created it will allow the weaker countries to share Germany’s credit rating and hence they will be able to borrow at lower rates. However, for this, Germany would have to guarantee other countries’ debt which is highly unlikely.

(b) ECB buys bonds of weak countries: One of the solutions to cope up with the meltdown is that ECB buys bonds of the heavily indebted Eurozone members. The ECB has earlier bought Greek, Irish and Portuguese bonds and is now buying Italian and Spanish bonds. But this is not a bottomless pit and purchases would have to stop at some point.

(c) IMF should come to rescue Eurozone: International Monetary Fund should organize a global rescue package worth trillions of euros. Europe’s debtor nations could borrow at low rates with long maturities. Once a debt pressure is relieved, Europe could follow more pro-growth economic policies.

(d) Developed nations can write off the debts: A solution to the ongoing eruozone crisis can be achieved if the developed nations negotiate and write down on their debts or defaults on them. Superficially, this seems a solution. But it would create other problems. Defaults would inflict huge losses on banks, insurance companies and will lead to collapse of many European banks and finally the global economy will fall into Great Recession II.

Thus we can analyze the fact that there are no easy solutions to the crisis confronting Eurozone. However, the urgency for solid steps to confront the issue is also increasing day by day.

Source: International Affairs (IAS Our Dream)

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