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November 29, 2011

Eurozone Credit Crunch

POLITICS - The European Union is facing a huge credit crunch and there really is only one solution...

Raise corporate taxes and income tax on the rich.

Instead the 17 finance ministers of the countries that use the Euro met at the EU headquarters today in a desperate bid to protect the value of the Euro and prevent a debt-induced financial tsunami that could sweep Europe.

The problem is that a number of European countries are spending beyond their means and their taxes are too low to support such spending. If they cut jobs it will cause a recession.

And you can't keep raising taxes on the poor and middle class, because that will also spark a recession.

The ONLY solution is to raise corporate taxes and income tax on the rich. Because the rich can afford it.

The problem is that the rich also make political donations and don't like extra corporate taxes. Which puts politicians in a hard place. Do they let their economy crumble (in which case the rich keep getting richer anyway) or do they become fiscally responsible?

The 17 ministers are discussing ideas that would have countries ceding fiscal sovereignty to a central authority; some kind of elite group of Euro nations that would guarantee one another’s loans — but require strong fiscal discipline from anyone wanting membership.

The question then becomes, what counts as fiscal discipline? Because cutting jobs or raising taxes on the poor would count as belt tightening, even if they're mistakes.

The fear is that the crisis — which has already forced bailouts of Greece, Ireland and Portugal — could engulf bigger economies such as Italy, the eurozone’s third-largest. If Italy were to default on its debt of €1.9 trillion ($2.5 trillion), the financial fallout could send shock waves throughout the global economy and spark another global recession.

Italy’s borrowing rates shot up today to above 7%t, an unsustainable level on a par with rates that forced the others to seek bailouts. And those bailouts just mean more debt. Its just paying debt with more debt.

Its like defaulting on your mortgage, selling the house, buying a BIGGER house and getting a bigger mortgage with a worse interest rate.

Worse these 17 finance ministers need to push their reforms through quickly... unlike previous reforms which took years to implement due to referendums.

The 17 ministers are also to discuss jointly issuing so-called Eurobonds — an all-for-one, one-for-all way of having the different countries guarantee one another’s debts. Right now each nation issues its own bonds, meaning that while Italy pays above 7 per cent, Germany pays about 2 per cent.

Having stronger countries like Germany stand behind the general European debt would lower Italy’s borrowing rates — and prevent a debt spiral that leads to a national bankruptcy. But it would raise Germany’s cost of borrowing, hence why Germany has been fiercely opposed to the Eurobond proposal.

If the European Union fails to fix its debt woes, bank lending would freeze, Europe's stock markets would likely crash, and Europe’s economies would crater. Economists believe such a collapse could see Europe’s economic output fall temporarily by as much as 50%, according to UBS forecasters.

Such debt problems would hinder the USA and Asian economies, the same way the US Recession sparked a global recession.

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