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How long can the
ECB kick the can down the road? How big a hole will
Greece dig before the ECB, the EU, and IMF realize
that "Plan A" (austerity
will fix problems by 2013), cannot possibly work? Is the amount of money the EU, IMF, and ECB willing
to throw at Greece unlimited?
Those are the questions on my
mind as I read How the Euro Became Europe's Greatest Threat
on Der Spiegel
In the past
14 months, politicians in
the euro-zone nations have adopted one bailout package after the next, convening for hectic summit meetings, wrangling over lazy compromises
and building up risks of gigantic
dimensions.
For just as long, they
have been avoiding an important conclusion, namely that things
cannot continue this way. The old euro no longer exists in its intended form, and the European Monetary Union isn't working. We need a Plan B.
If it wasn't for the
euro, Greece's debt crisis would be an isolated problem -- one that was tough for the country, but easy for Europe to bear. It is only because
Greece is part of the
euro zone that Athens' debts are a problem for all of its partners -- and pose a threat to the common currency.
If the rest of Europe abandons Greece,
the crisis could spin out
of control, spreading from
one weak euro-zone country to the next. Investors would have no guarantees that Europe would not withdraw its support from Portugal or Ireland, if push came to shove, and they would sell their
government bonds. The prices
of these bonds would fall and risk premiums would go up. Then these countries would only be able to drum up fresh capital by paying high interest
rates, which would only augment their existing budget problems. It's possible that they would no longer be able to raise any money at all, in which case they would become insolvent.
But if the current situation continues, the monetary union will invariably turn into a transfer
union, a path the inventors
of the euro were determined
to prevent.
Democratic Deficiencies
The euro's founding fathers did not anticipate such a crisis, and thus did not include any provisions for it in the European Monetary Union's set of regulations. The
euro welds together strong and weak countries, for better or for worse. There is no emergency exit, and there
are no rules to follow in
an emergency -- only the hope
that everything will turn out well in the end.
The euro, created with
the aim of permanently uniting Europe, has become the greatest threat to the continent's future. A collapse of the monetary
union would set Europe back by decades,
dealing it a blow from which
it might never recover, especially with Europe's position already threatened by the fast-growing Asian economies. How is a fragmented Europe to prevail against this new competition?
This is why Europe's politicians want to defend the euro at all costs, and why they are approving one bailout package after the next. They are playing for time, hoping that the markets will settle down and the reforms will take hold.
Those snips were
all from the first page of a five page article. Inquiring minds may wish to give
the link a closer look.
Lend-and-Pretend (Plan A)
is clearly not working. Yet ECB president Jean-Claude Trichet insists
it "must" work.
Why?
Because there is no Plan B, and more importantly
Because Trichet insisted there be no Plan B. Such is the nature of stubborn, arrogant fools.
Mish
GlobalEconomicAnalysis.blogspot.com
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Mish's Global Economic Trend Analysis
Thoughts on the great
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currencies, interest rates, and policy decisions that affect the global
markets.
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