Imagine this! One fine day, you take a walk to the theater and find out that there is an Oscar winning foreign language film being screened. After having bought the tickets, you stroll towards the theater feeling all exuberant about the prospects of watching this film. The movie begins with the introduction to the story about to unfold. And then to your utter horror, you realize that there are no English subtitles accompanying the story line. What do you do? You cannot walk out of the theater since the money is going to charity and you feel inappropriate to walk out at the beginning. After a horrific two hours battle with your internal self, you walk out of the theater feeling a little lighter and making a resolution to never watch a foreign film again. The situation explained above is somewhat reminiscent to the events developing across the European continent in anticipation of the conclusion from the EU summit- everything is blurred!
The major part of the underlying problem is we have very few details. Yesterday, a memorandum-an interim report-titled “Towards a Stronger Economic Union” was published that outlined some possible EU treaty changes written by the European Council President. The German Chancellor and her French counterpart wrote a letter to Van Rompuy, European Council President. But the fact of the matter is that both these documents are not transparent- leaving more room for the guessing game. Investors opine that the general outline in itself is a huge disaster.
In exchange for creating a stronger fund or group of funds to support European sovereign debt issuances, the euro zone countries are expected to hand over a good bit of their fiscal sovereignty. If a euro zone country violates the rules, the EU can step in and force the country to make hard decisions. Now a country in this position will undoubtedly have to suffer. But there is no moral reason that suffering should necessarily be visited upon its people to the exclusion of its creditors. The decision should mostly be a practical one of what combination of debt restructuring, tax changes and spending reform will be best for the country in question. Spain and Italy, please do take notice!
In any case, the wisdom of paying off creditors in full or forcing them to share the burden is at least debatable. The idea that foreign bureaucrats will be able to force the decision to go one way is an invitation to revolution. At the very least, we can expect widespread social disruption-riots, strikes and political upheavals.
Investors are awaiting the release of the foreign film with subtitles. Till now, everything is without one!