By Anastasiya Pershkina
This week Europe narrowly escaped the loss of a major donor to the European Stabilization Mechanism in the face of Germany.
Europe could have easily slid to a new economic crunch after four years of the current crisis. Now that things have been straightened out, experts are summing up the results of the past four years and making a not-quite-favorable forecast for the future.
The crisis struck on September 15th 2008, when the US investment bank Lehman Brothers went bankrupt. The US didn’t bear the brunt of the crisis – it hit the developing countries and Europe. First Greece, and then Spain, Italy, Portugal, and other countries of the eurozone went down one after another. As experts resort to various methods to rescue the eurozone, their recent ‘know-how’ produced the European Stabilization Mechanism. The ESM’s total value will be €700 billion, 80 of which will come from 17 member countries, and one third of the total should be supplied by Germany. A group of nearly 40,000 Germans sought to dispute the government’s generosity in court. If the government’s decision to help the eurozone out had been found illegal, the eurozone would be deprived of its only chance for survival and Germany would now be faced with a political crisis. However, Germany has reiterated that despite the odds it won’t leave the eurozone. BIN FINAM CEO Georgy Voronkov comments.
“Chancellor Angela Merkel strained her voice trying to underscore that Germany is part of the eurozone and should do its utmost to help. As a politician, Merkel is trying to support both her fellow citizens who oppose an unlimited increase in expenditure, and her EU neighbors who require an increase in social spending, which means printing more money.”
While it’s unclear whether the European Stability Mechanism will be able to work effectively in the future, it’s clear that it will be able to address some eurozone problems now. Anna Bodrova of the Investcafe independent agency, comments.
“As we witness the rising bond yields of Spain, Portugal and Ireland, the market pledges a certain amount of risk in these bonds. Besides interest, it will charge for risk. At 6-7% on bond yields, the country finds it pointless to borrow from the market. As a result, crisis worsens and the country has to ask for global assistance. If the European Stabilization Mechanism starts to buy up these bonds, the market will understand that the European Central Bank supports this sector. The bond yields will fall and the ESM will become effective.”
The good news from Germany arrived by the start of a regular session of the US Federal Reserve, which launched a third round of quantitative easing, or QE3. The US economy will thus get a new influx of currency and will begin to show signs of recovery. Yakov Mirkin of the Institute of Global Economy and International Relations warns against sounding joy so prematurely.
“We’ll have to rise up as they issue more money in Europe and overseas. We’ll inevitably see a concentration of bubbles and risks. Over a medium term, we’ll be able to forecast the burst of these bubbles. This could happen on the oil market.”
The European Stabilization Mechanism and the QE3 from the US Federal Reserve demonstrate that politicians and economists have learned to address only short-term issues. In the meantime, the situation is alarmingly unstable, Yakov Mirkin says.
“The current state of global financial systems can be compared to a vehicle that trudges through a snow-covered road in nearly impassable terrain with a driver who hasn’t driven for a long time.”
The global economy has seen two waves of financial crisis – the first in 2008 which hit Asia the hardest, the second in 2010, which inflicted irreparable damage on the eurozone. This autumn, economists say, should see a third wave of the crisis. Europe will bear the brunt of the blow, as Greece may quit the eurozone in October. No wonder then that countries are trying to cut contacts with Europe and reroute their financial resources to other markets. US experts speak of the need to transfer capitals to the BRICS countries. Russia made it clear during the recent APEC summit that it would prefer to work with countries of the Asia-Pacific region to cut its dependence on Europe.