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May 10, 2010

European Union’s $1 trillion bailout

POLITICS - The European Union's bailout (worth almost $1 trillion USD) was greeted today by a soaring Euro and a stock market rebound. The bailout was a bandage solution to a spreading debt crisis in Europe where multiple countries, especially Greece, are close to bankruptcy.

Greece will receive 110 billion in an effort to get its financial affairs in order, but will have to cut back on social spending and freeze government wages until they can turn their financial woes into gains.

Debt laden countries will also see their interest rates go down, making it easier for companies and people to borrow money.

The source of the problem is a global issue which governments are sadly choosing to ignore rather than trying to solve through firm negotiation: China and its pegging of the yuan to the US dollar.

China keeps its currency pegged to the US dollar and rarely allows it to fluctuate. In reality the yuan is worth a lot more, but China keeps its exchange value much lower so it can compete internationally for exports.

The result however means that corporations in other countries and regions like the United States, Canada and Europe sometimes close factories and move their manufacturing business to China where the workers are cheaper.

Its not just the yuan's value that is the issue either. Its also China's weird version of a minimum wage. Instead of making a minimum wage that is by the hour, China's minimum wage is based on per month (which makes it very difficult to regulate). China's minimum wage also varies from province to province, the highest is a mere 1000 yuan / month... approx. $150 / month.

In comparison Greece has a minimum wage of 25.01 Euros per day or €680.59 a month (no hourly minimum) and is one of the lowest minimum wages in Europe. But compared to China that is $867.13 USD per month.

The solution however is not for European countries to lower their minimum wages. The USA and other countries are all in same boat... between China's pegged yuan and extremely low minimum wage other countries can't compete for cheapness.

But they can compete when it comes to technology, quality and peace of mind. China has developed a horrible reputation for making fake goods that are dangerous, don't work properly and hazardous to the health.

But frankly there is another solution... what gives China the right to peg their own currency to specific currencies? What is to stop the European Union from pegging the Euro to the yuan... but at a more accurate value?

As it stands the only way for the EU to raise the necessary funds is to issue government bonds and to borrow money from other countries, including China.

Which is to say China really has indebted countries (including the United States) by the financial balls in these matters.

So will another $1 trillion in European debt solve their problems? No. Its just a temporary band-aid solution. Solving bankruptcy with debt. Western countries need to cut back on trade with China and exercise more fiscal restraint.

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