The Euro debt crisis

The Euro debt crisis 

Date: 1 December
Time: 5 till 7 PM
Venue: The Auditorium

On the first of December we have a special session to compromise about the European Debt Crisis. Three economists give Will Their opinion on the Causes and consequences of the current crisis. The speakers are: Tim Legierse (USE alumni and senior international economist at the macro-economy Rabobank Netherlands), Niels Gilbert (USE alumni and economist at the Economic and Research Division of the Dutch Central Bank) and Marc Schramm (USE International Economist). We look forward to seeing you there!

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I went to the Campus Activity on 1^st December on the topic of the Euro Debt Crisis. The motivation is simple. As an economist, we are often asked about our comments in crisis. However, most people do not know that though we are able to reason and picture the reasoning behind the storm, not all of us are financial economist and that economist is not the same as financial specialist. Therefore, I often have no good answer on what is the solution to the crisis we see or could perhaps only give reply that works in theory.

The speech consists of three parts given by three economists from university, government and private bank. I was most impressed by Tim Legierse, who works in Rabobank as a senior international economist of the macro-economy. Tim started his speech with a Greek fable of the ants and cricket. In the story the ants gather food and store them for winter, while the cricket plays the violin and enjoy his summer. When the winter arrives, the cricket is cold and starving so he went to the ants’ home and begged for food. The ants tell him, we have worked hard in the summer to store all the food we need to live through the harsh winter but you didn’t. The ants refused to share their food and the cricket died.

What does this fable tell us? Yes, the moral lesson is that we should save in good times and prepare for the worse time.

How is this story linked to the world today? With some twist and stretch, think of the Western European countries (Taiwan) as the ants and the southern European countries (USA) as the cricket. The summer is ones working life and the winter is ones retired life. We all work and save while we can for our retired times, for which we are unable to work and mostly consume. The saving is also slightly different. For the ants they stock and store "grains", we modern human save in monetary terms, as if saved to buy machinery that will produce for us at a later time. Money does just this, as a mean of storage, remember?

For those country that saved more, they lend the extra money to those that consume more at a given period. This is done in exchange for future consumption with their saving. While the country that spent more in the initial period is expected to repay their loans (grains lend earlier) by careful use of the loan for investment (seeding) which is expected to produce more in the later period to repay their debt.

Now we see that during the Ants work-life, the Ants saved to the Cricket and expect to be able to withdrawn from them when the they retried. However, now it has come to the time when the Ants find the cricket had not invest their savings carefully and might default. The Ants can force the Cricket to repay, which they cannot but just go bankrupt; or the Ants can extend the deadline for repayment and work longer expecting the Cricket to repay in the future.

This is perhaps the trap most Ants find themselves into. The only option is to deferred their debt collection, while worrying the Crickets repay their debt with a devaluing currency. This is as if you get all the grains back, but now all the grains are only 1/2 of its original size.

This is a trap, but what do you do?