In late 2011, the U.S. agreed to lend dollars for euros , and the ECB agreed to lend money to troubled European banks . The positive outcome was the stabilization of the Spanish and Italian bonds. The world has collectively exhaled from the event and is breathing normally again. Before that moment the Italian and Spanish bonds were escalating to epic rates that could have led to a series of defaulting European banks and then who knows what would have happened next?
With the stabilization of the European sovereign debt, the U.S. stock market has turned from red to green. The VIX is down and the positive growth indices are up such as the Dow, S&P, and GLD. Everything looks pretty rosy now, but has anything really changed? Haven’t we just put lip stick on this pig?
The PIIGS are still structurally a mess, and only through recent monetary policy, bureaucrats have been able to successfully calm the markets. The ECB said they were not going to bail out the PIIGS, but doesn’t their most recent policy do so indirectly?
If it looks like a duck and quacks like a duck isn’t it a duck? The ECB is not directly lending money to the PIIGS, but the ECB is lending money to European banks at 1% interest for three years. And in only one month, the Euro banks have borrowed close to 500 billion dollars, which happens to be the size of the Greek debt . Eventually, the European banks will use that money to buy up the PIIGS sovereign debt. This is the short run solution to the PIIGS and Euro crisis. The problem of GDP growth and the lack of incentives to work haven’t changed, but the lip stick sure looks good.
9 comments:
Although the US loan has currently provided relief to the crisis, I think it is only going to be a short lived relief. I agree with the statement of "putting lip stick on the PIIGS" due to the fact that the US loan has only temporarily covered up the European problem or made it "prettier". Eventually the "lipstick" will wear off, revealing the same ugly problem at hand.
I agree with this article because the US is only giving short term relief to the crisis in Europe from the loan and needs to find a better solution to the crisis. For example, Give a man a fish and he will eat for a day, teach a man to fish and he will eat for a lifetime.
I also agree with the idea that they are only temporarily patching a hole in a sinking ship. I think there needs a to be a bigger importance put on working and maintaing steady jobs, beginning with the citizens of PIIGS. By the U.S. agreeing to lend dollars for euros, Americans were able to indirectly protect their stock market, so this decision had a positive outcome, making the transaction worth it. Rather than continually feeding the PIIGS loaned money, a long term solution needs to be devised because this an endless cycle of debt cannot be good for any country, no matter how big or small.
The stabilization of bonds does indeed bail out the PIIGS. Especially since everything in the EU is so connected, the indirect bailout of Spanish and Italian bonds will essentially help to bailout more of Europe as well. I agree that the European banks need to be taught somehow to manage this problem--because while we are helping them now, if the banks are in as bad shape as is said, this bailout will not last forever and in my opinion the US does not need to increase its debt by helping out countries that we are not so directly economically tied to. There are more important American or Chinese or Indian companies that have more need for the money.
I think that what we just did for the "PIIGS" countries is a way for the governments to push the main problem off until later. I agree with the phrase "Isn't this just putting lip stick on the PIIGS" because we are just making it look like we are taking care of the issue even though it is still around but not as bad. After reading this article I am wondering if we keep pushing the problem further down the road, will it be worse and worse when we have to face it again in the future?
I think the European Union is only putting off the problem at hand and thinking of short-term goals when they should start to focus on more long-term goals. If they start to focus on the long-term effects of what they are doing or could be doing they might be able to alleviate some of the pressing issues in their economy. I think it would be more beneficial to start brainstorming long-term goals and plans instead of pushing the problem down the road.
Lending money to the European Banks at such a low rate was a colossal mistake, which only encouraged poor fiscal policies which is why I'm glad to hear that LTRO has been shut down
I agree with Emma- these solutions are only temporary fixes that will only succeed in the short term. What really needs to happen is the ECB needs to take a step back, and take a serious look at things, and give this problem a good fix instead of flubbering about and playing kick the can in the streets like kids.
Aren't we making the same mistakes over and over again? shouldn't we just go straight to the root of the problem instead of just throwing money on it? It seems we are digging an even deeper hole.
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