Crossroads (Toward Philippine economic and social progress)
Philippine Star, 9 November 2011

The euro debt problem caused much more economic uncertainty. Wild swings of stocks, bonds, currencies and commodities characterized recent world markets. And as felt in Greece, the same problem was seen as a big political drama as well.

Greek pain and euro debt rescue plan. On a daily basis, Greek pain was evident in clashes between demonstrators and lawmen. The immediate problem is for the international financial community to put up a package that will assist Greece to meet its payments and give it leg room for reforms. This new rescue international package involves an additional 130 euro ($179 billion) loans and a 50-percent reduction of Greek debt agreed to by the financing banks.

Even with this concession on the part of the creditors, Greek citizens face the burden of tax increases, reduced public spending on vital social programs, a cut of wages and pension benefits, the privatization of state assets, and to top it all, certain prospects of economic hardships. The politicians had to sell an unpalatable program.

The costs of exclusion from the euro zone. A Greek default would bring consequences that are as bad and as unwelcome as what the country already faces: economic collapse of large magnitudes, high inflation, and the pain of expulsion from the euro zone.

Thus, the ink on the grand rescue package was hardly dry when the Greek prime minister, facing a party revolt at home and a confidence vote in parliament, announced that he would put the question of the debt package to a national referendum.

For Europe and its euro zone, that route would cause further worsening, not containing, the euro debt crisis. Rejection of the debt package in Greece would trigger greater uncertainty and place the euro as a currency in jeopardy. Widening the debt problem toward an unmanageable proportion would become a likely possibility. It was almost likely to put to question the euro zone experiment.

For this reason, the response of the lenders was swift, threatening Greece with the withdrawal of the debt package and certain expulsion from the euro zone if Greece went through with the referendum. The immediate withdrawal of needed finance meant advancing the suffering that it is facing, and much more, because domestic economic chaos rather than order could be the consequence.

Armed with this economic disaster as warning, the Greek leader backed away from the referendum and submitted his government to a parliamentary vote of confidence that was won with the narrowest of margins. But this political victory was achieved with a solution in which the current government would be replaced with a national unity government.

This victory also came at a major cost to George Papandreou, the prime minister. He would resign as soon as the new unity government is formed. The unity government will oversee in the interim that the domestic measures of compliance are put in place prior to elections four months later. In yielding momentary leadership, the Greek leader probably bought for himself a place in the politics of the future in another time.

The bigger euro debt drama is just beginning: Italy. Even as future uncertainty is still likely to ensue from the Greek debt problem, the European debt drama is now moving toward a bigger problem: Italy’s immediate economic future.

With the Italian case, the euro debt problem moves up in scale. Italy is the third largest euro zone economy. Among the zone economies, it has the second to the highest debt to GDP ratio. Because it has not introduced fiscal measures to contain its own debt situation, Italy’s problem looms as a much bigger problem if and when it becomes more serious.

The nervousness on the Greek debt problem has exposed Italy’s weak side. The borrowing cost on its debt has risen to dangerously levels, nearing seven percent, making it now unsustainable. As a result, the Silvio Berlusconi government has turned to the IMF for closer monitoring of Italy’s problems only recently, signaling that it would have to seek a bailout of its debt position.

Because Italy is a big country, its impact on the euro zone and on the world will be much bigger. Whereas the Greek problem brought big ripples on financial uncertainty, an Italian problem could stir big waves. Italy’s bigness could have a punishing impact on Europe’s, perhaps the world’s, financial problems.

What does this mean to the Philippines? The euro zone debt problem is not likely to leave seemingly remote countries like us unaffected. The financial horizon will be clouded until the danger of contagion to other countries with which we have significant relations is gone. Financial instability threatens the real economies of all countries involved. Somehow, our large economic partners – the United States, Japan, China, and Korea have economic and banking relations with Europe that could be threatened.

The systemic effects will be on Europe’s financial institutions. This is why major restructuring of European banks – especially those in the most heavily exposed countries of Germany and France and those in crisis situations – is happening. Such a system causes momentary pain which could become even more festering. It has the danger of becoming deeper. In that case, the real economic contraction could happen. A drop in demand in those economies affects the world economy more directly.

From the Philippine viewpoint, what that means is that we can expect more financial uncertainty and, to that extent, perhaps more constrained growth prospects. It helps the country enormously that the Philippine banking system has undergone recent increases in their capitalization thereby insulating them from crisis. Despite this, any decline or standstill in the European economies could reduce the natural stimulus that economies need to keep on improving their economic performance.