Thursday, March 28, 2013

Moral Hazard: A Global Epidemic?

     The European Union has been a roller coaster for several years now.  The growing instability of many countries in the Eurozone have been raising concern for traders and citizens alike, vis a vis Cyprus.  The bailout deal in Cyprus has many Cypriots outraged and has led to even more thoughts of Eurozone instability.
     Germany is sick and tired at this point of continuing to foot the bill for countries who have not followed their path back to prosperity.  Germany was able to right their ship by cutting wages and hours for employees to build revenues back up and build the economy from the ground up.  Germany continued this path with high taxes and strong labor unions protecting the working class.  When Greece hit their economic rock bottom and austerity was proposed by the EU and IMF, their citizens revolted.  Germany does not want their currency to continue to be devaluated due to corrupt governments and poor investing and banking decisions.  They have taken the right steps and do not want to be plagued with nations who do not subscribe to their method.
     Cyprus's economy is microscopic in the scope of the EU but their bailout has raised new questions to the issue of moral hazard.  Is moral hazard going to become a global epidemic because nations know the IMF is going to be there to pick them up when they fall?  Is "too big to fail" really a modern global economic philosophy?  The world has seen its fair share of IMF and EU bailouts in the Eurozone and it begs these questions.  What is going to cause these countries and banks to stop their ways and become more responsible?
     The United States is not exempt from this argument.  We have contributed to global bailouts because banks were "too big to fail."  The philosophy is that if these banks failed, it would cause an economic Armageddon and rates would plummet leaving behind global instability in the banking system.  Some economists believe failure is good for business and banks because it allows them to take risks but be responsible with their business.  Some say institutions need to go through the process of bankruptcy to rebuild and come out better and stronger.  By continuing these bailouts, we not only put more instability into the markets, but instill fear and burdens on the citizens affected.  The original Cypriot bailout included an across the board tax on deposits to banks which shifts the burden to citizens who had nothing to do with the default in the first place.
     With countries such as Spain, Portugal, and Ireland on the brink of default, what is the stability of the EU for the near future?  In theory, this shared monetary union was a progressive globalization tactic for nations to more easily share goods.  However, nations such as Germany have seen their currency devalued globally while their economy is thriving.  Today, the United States and the EU began talks regarding a free trade agreement.  While many subjects were discussed, one which caught my eye was lowering tariffs especially "regulatory and nontariff barriers"which may hurt trade.  The EU needs to do something to stabilize their fragile state right now and despite what many skeptics may say, a trade agreement could be a start.  I do not envision a foreseeable future for the Euro because while their global stock was profitable for some time, the unpredictability and instability of the countries in the Eurozone is going to cause problems.  No one single nation can leave the Eurozone without disastrous consequences to the global market. 
     As recently as a few years ago, there were talks of a North American monetary union.  As with Germany and the EU, the United States currency would have been significantly devalued with the addition of Mexico.
     While the long term future of the EU is still unclear, it is evident that their short term has been deeply rooted in an epidemic of moral hazard which has contributed to their instability.  For nations to get back on track, the IMF needs to take more responsibility in enforcing austerity measures and intervening early when nations in need ask for it.  If this pattern of moral hazard continues, our global market is a gloomy one.            

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