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Eurozone Salvation: Another Marshall Plan?

22 May 11:29 AM

It is expected that the European authorities will present a new eurozone salvation plan during forthcoming EU summit (June 28-29^th). Some experts have called it the new “Marshall Plan”. After the first detail of the new plan were revealed, European markets started rallying…

65 Years Later: Another “Marshall Plan”?

What unites the old and the new “Marshall Plan” is the tough conditions under which they were and will be implemented. The Marshall Plan was implemented after World War II when most European economies were devastated and needed external help to recover. For example, let’s consider what was the manufacturing production capacity in different countries in 1946 as compared with 1937: Italy – 40%, Germany and Austria – 34%, Japan – 30%. Post-war Europe suffered from multiple problems like food and recourse shortage, insufficient labor power and terrible unemployment.

Thanks God, these days Europe is free from most of these problems. Nevertheless, it can “boast”:

· Relatively high unemployment. It has reached the 15-year low – 10% (over 20 million people). Experts anticipate further unemployment growth.

· High public debt. The total public debt of all the eurozone economies is around 82% of the eurozone GDP.

· Faint economic growth. This year it is expected to decline down to 0.3%.

· Unstable Euro currency. The probability of Greece leaving the eurozone is the key factor affecting the Euro exchange rate. The European authorities have already estimated the possible consequences of such a scenario. Obviously, they won’t be beneficial for the common currency.

According the Masterforex-V Academy, EURUSD continues its downtrend. The closest levels of support are 1,2899, 1,2870 and 1,2848. A change of trend will take place if there is a break above 1,3043 attended by a bullish FZR.

The Marshall Plan:

It is common knowledge that the Marshall Plan was implemented in 1948-1951. 16 countries participated in it (including the UK, Greece, France and Portugal ). They received almost $12.4 billion or 5.4% of the US GDP. The major European economies (the UK, the Netherlands, France, Italy and Western Germany) received over 60% of the sum.

Most of the aid was provided for free. 70% of it was provided in the form of fuels, food and raw materials.

According to ForexTrend (a member of the TOP 10 of Masterforex-V Academy’s rating Forex brokers), the key difference between the old and new plan is that this time Europeans have decided to save themselves without external help.

What is currently known about the new “Marshall Plan”?

The European investment bank and private investors are expected to allocate €200B of investments to create new jobs and to stimulate the European economy. All the EU countries will be obliged to donate €10B each. However, according to El Pais, the Spanish newspaper that was the first one to publish some details of the plan, if to consider the eurozone’s major debt problems, the plan looks unreal.

There are other ideas of accumulating the funds, including those proposed by Francois Hollande, President of France. The European authorities are planning to put into use the unused €12B left from the EU tranche provided in order to resolve the debt crisis in Greece, Portugal and Ireland. It is also planned to attract foreign investors. In this case, the EFSM will act as a guarantor.

As for expert opinions, the analytic team of Nord FX reports, that most experts point out the following:

The timeliness of the new plan. For the first time since the crisis broke out the eurozone economies can proceed to the stimulation of the economic growth. According to Christine Lagarde, Managing Director of the International Monetary Fund, the austerity time is gone.

Its insufficiency. Some experts say the mentioned funds are not enough to enliven the eurozone economy. Even €1 trillion provided by the ECB failed to do that. Moreover, since 2010 Greece has received €240 of loans and extra aids. Greece even managed to get almost 50% of its debt written down but eventually failed to come out of the recession.

The slow pace of its implementation, which can eventually make it senseless.

Its insufficient depth. The eurozone economy needs cardinal structural changes. According to David Cameron, the common European currency needs a common government.

Obviously, the old “Marshall Plan” didn’t have numerous drawbacks of the new plan. 65 years ago everything was implemented quickly and effectively. For example, the outdated industries were restructured in a short space of time. As a result, Europe recovered from the consequences of World War II much faster than expected.

There's no such thing as a free lunch

When comparing the 2 plans, we should keep in mind that the “Marshall Plan” is not about economy alone, it is about politics as well. The thing is that USA’s help didn’t look like charity. (Read “American roller coaster or why the U.S.A. prospers while the rest world expects the default of the last super state”).

The US clearly had multiple interests when supporting Europe after World War II:

1. To make Western Europe a reliable ally. That is why the USA decided to support its political system, which was in crisis after the war, i.e. to support capitalism and to save Europe from the spread of communism.

2. To create a huge outlet for US goods, thus supporting its economy. The Marshall plan implied selling US raw materials, foodstuffs and other products to European countries. At that time, the US economy was overheated and was nearing anther crisis. So, the Marshall Plan allowed the US to offload its economy, thus eliminating excessive production. However, the USA wanted Europe to flourish, not to go broke.

3. To establish political and economic control over Europe. That is why the USSR abstained from participating in the “Marshall Plan” and forbade other Soviet countries to accept the aid.

The make the long story short, the USA managed to take the biggest political and economic advantage of the Marshall Plan. They started dominating Western Europe and turned into a global superpower.

As for Europe, 5 years after the end of WWII its GDP nearly recovered up to the pre-war level…

Market Leader and Masterforex-V Academy would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:

Do you think the eurozone has a chance to survive the crisis?

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