I was reading an Economist article yesterday about the Greek economic debacle. After looking at the declining investor confidence in Greek bonds and the likely repercussions of the IMF rescue package, the article went on to talk about the generally dismal state of Euro-zone economies and the impending crisis that may strike Spain and Portugal. There was an interesting statistic at the end of that article – the average Euro-zone public debt is 68% of GDP. That of the US of A is 70%. Still it is only Europe that is in crisis and not America.
In its conclusion, the article also gives a brief answer to the reason for this discrimination between Europe and America – the world’s reserve currency is the US dollar. In effect, what this means is that the rest of the world cannot allow America to be in crisis for very long. It is in the interest of the global economy to ensure that America is always bailed out on soft terms, at least for now.
At the time of the 2008 Crisis, there was a lot of debate on the larger, global implications of the kind of global financial system that has been created over the years. One of the arguments, that has existed for a while, and came to the fore in the immediate aftermath of the 2008 crisis runs thus (and here I am paraphrasing from several sources): One of the primary reasons that we are a skewed global economy is that we do not have an objective international currency that penalises excess debt and credit both. We have created a system whereby, one side (in this case America) is always rewarded, regardless of debt or credit and the other side is always punished simply because, the international currency is the American Dollar. All economies hold their surpluses in dollar terms thus, making it in everyone’s self interest to ensure at the well being of the dollar by hook or by crook. This has led to the creation of a financial system that is benchmarked on nothing, whose value is based on biased speculation and not the fundamental value of the resource.
Yesterday’s Economist article brought this to the fore again, albeit in a very subtle manner. And to me it is unjust indeed that some countries should suffer and others not simply because the dice has been loaded since the beginning. I wonder if any generation, in the near or far future, will have the courage to dismantle this unequal system and create a level playing field.
