from The Great Debate UK:
How will the Eurozone crisis end?
-Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -
Back in 1997, when I wrote about the prospects for the forthcoming European Monetary Union, I said I expected something like the Greek crisis to end with a wave of bailouts of ClubMed countries, and I followed the situation through to what seemed its logical conclusion.
I guessed that Germany and the other surplus countries would realise they were caught in a can’t-beat-‘em-may-as-well-join-‘em trap. On balance, I think I stand by that forecast today.
The problem is of course that monetary union without fiscal union requires a willingness to leave member countries to stew in their own juice when they become insolvent.
In the current situation, this not an option because right from the start of EMU, Brussels used both direct and indirect methods to ensure that no invidious distinctions were made between the debt issued by member country governments.
So, in a regime that treated the bonds of all Eurozone countries as acceptable reserve assets, banks all over Europe (even in Britain) duly bought up sovereign debt with little regard for the creditworthiness of the issuer.
Many of the proposed exit strategies being discussed in the media are irrelevant because they miss the point altogether. The central structural problem in EMU is not that it has no stabilisation fund or any other mechanism for routinely channelling funds from surplus to deficit countries – in fact, the problem is not funding at all, it is enforcement.
Betting on the unthinkable in the euro zone
— James Saft is a Reuters columnist. The opinions expressed are his own –
Some crises bring partners closer together. Some, as investors in the euro zone are likely to discover this year, drive them further apart.
Look for rising tensions about fiscal and monetary policy among the bloc’s 16 member nations, and for a bigger penalty to be imposed on the euro and some euro zone assets against the possibility of a breakup or a secession from the currency group.
The liquidity crisis of last year left smaller members of the euro thanking their lucky stars they were inside a big warm tent with a major currency and critically, a powerful central bank that could help banks and maintain order in financial markets.
Ireland and Greece, to name but two, could look at the disaster in Iceland, which suffered a banking and currency collapse, and see the real tangible benefits of membership.
But now that the crisis has morphed into one in the real economy, with exports plunging and employment hit, things will be less cohesive within the euro zone, with one currency having to do duty for different countries with different economies and levels of competitiveness.
European governments vary widely in their ability to withstand the fiscal squeeze from falling tax receipts, as well as having varying ability to credibly take on programs of stimulative deficit spending. That of course is about all that euro countries have open to them when it comes to unilateral action, being forced as a condition of membership to live with a common currency and interest rate policy.
Saft is right again. The world-export-champ Germany has just published a tax system which is nothing else but a protection of the german car industy.
I mix with many German people here in Portugal and a few weeks ago they believed that saving the € was the best course of action for political and monetary stability. How quickly views change since various EU member states have revealed their deficits with more losses looming. Personally I think Germany will return to the DM as the German people are more than a little annoyed at the deceit of some of their neighbours, unless countries such as Greece and maybe one or two others are forced out of the €.
The American economy is supporting such massive debt it is difficult to see how the $ can continue to maintain it’s current level. While China continues to grow as the manufacturing powerhouse of the Western World, most Western currencies will continue to decline, except Germany because they understand what makes a stable economy.