SUGGESTION TO THE EUROPEAN PARLIAMENT PRESIDENT JERZY BUZEK

SUGGESTION TO THE EUROPEAN PARLIAMENT PRESIDENT JERZY BUZEK

To:               The Right Honorable European Parliament President

From:            Athinarayanan Sanjeevraja

RE:               EU policymakers misdiagnosed Greece Problems

Suggestions:

Good Morning Mr. President. There are few elements in the EU official line that have turned this into a full blown crisis. A year ago I wrote the European Commission President Mr. Barrosso, The Greece problem will go away if more debt is offered by the EU core to Greece at punitive rates. Now they are slowly facing the fact that Greece’s problem is more profound. Most of the eminent economist predicted that Greece default and bondholders haircuts are now back in the frame. But I believe in EU, EU won’t allow Greece to default.

The Private losses must be socialized. The poor lending decisions of private institutions in the past must not result in any losses for those institutions. Moral hazard does not apply to private banks. So the Greece, Portuguese, Irish and Spanish tax payer must accept the full current and future burden of these private losses on top of those sovereign debts which they already carry. The citizen of PIGS’s can see the value of their homes decimated, their tax soars, their incomes fall and their unemployment rise.

The ECB has made this barbaric principle the absolute condition of all bail outs and its own open market activities. Rather than bail out failed institutions in Germany and afflicted states, they have been preferred to force more debt on to the peripheries and make them responsible for bailing out those failed German and other institutions. It was far cheaper solution. In my view, it is impossible to overemphasis how bad the ultimate public backlash will be from this egregious injustice.

This is solely a fiscal problem. Greece austerity – a collapse in government spending and hike in government revenues is the only approved route to salvation. It witnessed simultaneous collapse in both private demand and public demand. The entirely predictable result is that economic activity has collapsed, unemployment has soared, government revenues has fallen but the deficit/debt have grown. So much austerity is far so little result. If I am not mistaken, country a country’s budget deficit by 1% of GDP typically reduces real output by about two-thirds of a percentage point and raises the unemployment rate by one-third of a percentage point. Rising domestic confidence is not the only route to growth amid austerity. Foreign demand is typically more important than domestic demand. EU policy makers failed to do it.

Let me conclude it, Mr. President. EU pushed all private losses on to the public accounts. You prescribed an antediluvian austerity program that has caused maximum suffering and still provided an increase in absolute deficit and debt levels. You also have refused to allow automatic stabilizers in terms of Euro currency adjustments to cushion the flow of the original crisis and to fuel a recovery. ECB increased interest rates tightening monetary policy and reinforcing a new credit crunch after imposing a fiscal crunch. It is difficult to conceive a more persistently blinkered and misbegotten set of policy responses to a crisis. I hope that you take decisive decision to save Greece from default.

Thank you very much for your kind attention to this issue Mr., President.

Sincerely,

Athinarayanan Sanjeevraja.