What if they had a revolution, and called it a debt crisis?
This is the real story of what is going on in Europe right now. It's not about Greece. It's not about budget deficits.
When the European Union created the euro currency, they created a disaster-in-waiting. Unlike the United States, which can never run out of dollars because it can always print more, the various governments of the eurozone could potentially run out of euros. The European Central Bank does not work for one eurozone government. It works for all the eurozone governments -- and that's a very different thing.
If any one country suddenly needs more cash, it can only get that cash with the consent of all the other countries. Unsurprisingly, that kind of unanimity is hard to obtain.
And so what we're seeing now is a kind of slow-motion bank run, with investors losing confidence in country after country. Even France -- the second-strongest economy in Europe -- is threatened: France must now pay a full percentage point more interest on its bonds than Germany, the widest gap since the advent of the euro.
There are two escape routes from this crisis.
Escape route number one is to bust up the euro. People who own Greek bonds will be repaid in New Drachmas. People who own Italian bonds will be repaid in New Lire. French creditors will get New Francs. And German creditors will get New Marks.
This first escape route will be an economic disaster, and not only for the poorer countries of southern Europe.
The French and German taxpayers who refused to bail out Greece and Italy will end up bailing out the French and German bankers who lent to Greece and Italy.
And the harm will not stop there.
Remember the country that profited most from the euro currency was Germany, the most productive country in Europe. So long as the euro existed, Greece, Italy and the other weaker economies of Europe could not devalue against Germany. The euro worked to make German exports cheaper -- with the result that between 2000 and 2010, Germany's share of world trade rose by almost nine per cent -- even as the shares of most other eurozone countries declined.
If the euro busts up, German exports to the rest of Europe will collapse -- and German companies will relocate out of Germany into the other EU countries.
The Germans complain that the costs of rescuing the euro will fall on them. That's true. But it's also true that the benefits of the euro mostly accrued to them.
The euro currency allowed Greece to borrow more cheaply than it otherwise could. But the euro allowed Germany to sell more cheaply than it otherwise could. Who is the real winner in this story?
Which brings us to escape number two.
If the euro is not to bust up, it must be saved.
Friday morning, The Globe and Mail reproduced on its front page one plan to save the euro. It looked as complicated as the design for a nuclear reactor: Arrows running every which way, incomprehensible acronyms strewn about the page.
All of that complexity that is designed is so much chaff, thrown into the eyes of the public to conceal the hard reality of what is actually being proposed:
Europe is about to create a new central borrowing power to assume responsibility for the debts of the weaker borrowing countries. To service these assumed debts, the new central borrowing power must gain a new taxing power. To prevent the problem from recurring, the weaker borrowing countries must surrender some of their spending powers.
Does that sound too technical? OK, put it more simply:
Europe is about to create a new super-government -- and Greece, Italy, Spain and the others are about to be demoted to provincial or state local governments, subordinated to this super-government.
What Europe must do to save the euro is very similar to what Alexander Hamilton did in the United States in the 1790s to create the dollar. The new federal government assumed responsibility for the Revolutionary War debts of the former 13 colonies. The new federal government also took control of what was then the most important revenue source: Customs duties. The states were relieved of their debts in exchange for surrendering some of their taxing power.
But there is one huge difference between Europe today and the United States in the 1790s. The new American super-government was elected. The new European supergovernment won't be. Americans went into their arrangement with their eyes open, understanding the implications of their choice. European voters, by contrast, are being told that they are making a merely financial decision. As with the original euro decision itself, the true implications of the rescue plan will not be revealed until it is too late to reverse them.
This blog originally appeared in theNational Post.
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Then Greece would not be able to participate in the international business, except on a cash and carry basis until they pay back the money that they borrowed and then spent on themselves.
This might be the future US position also.
The Greek GDP was living off of the government, not creating things to export and sell to create any NATIONAL WEALTH to support themselves.
The USA could (or in effect does) but and print US Dollars (actually US Treasury Bonds) whenever the government expences exceed tax collections.
These freshly printed paper US Treasury Bonds that the US government periodically auctions off (sells) to wealth producing people in industrialized nations to get back some of the US dollars that we paid them to manufacture our consumer goods in order to pay for government expenses have no value,, except that they are redeemable for title to privately owned businesses, factories, casinos, hotel, farms, land, ports, breweries, refineries, forests, ports, breweries, refineries, and other privately owned assets located in the USA that were created by previous wealth producing US generations instead of Gold from Ft. Knox.
The US government is going to have to start printing and selling more and more of these freshly printed paper US Treasury Bonds, and other debt instruments to foreign industrial manufacturers faster and faster at greater and greater discounts from current worth to get back enough foreign held US dollars from foreign individuals and foreign manufacturers in sufficient quantity to pay for all of these the growing US government expenses that are in excess of our US federal government tax collections as the USA runs out of titles to assets that foreigners can redeem for their US Dollars.
regarding Europe's financial history, the last 800 years or so. It is, reading it nowadays,
a very colourful history.
It is a history that includes lots of defaults by kings or monarchs. And this means there
are plenty of cases in history where a souvereign defaulted, where the governments
had practically endless problems with their finances.
Not knowing history can mean being condemned to repeat history.
http://socratesbooks.blogspot.com/2011/09/financial-history-of-western-europe.html
The only point I would add is that the major problem right now is that European banks, most notably the big French ones cannot get funding.
Their only source of liquidity right now is the European Central Bank.
One of those big banks might go down at any time, probably before the contagion from Greece even spreads to Italy or Spain.
The whole thing could implode before the political shot gun marriage discussed by Mr Frum could be arranged.
http://www.nytimes.com/2011/11/01/world/europe/greece-to-hold-referendum-on-new-debt-deal.html?_r=2&hp
National referendums on key issues -- what a democratic idea.
And he was born in St Paul, Minnesota,
In other words, European nations are like US States.
The leaders of the emu simply need to have the ECB fund the member governments deficits. Those deficits have to be large enough and last long enough to spur growth and jobs until the Private sectors in each economy get back to producing jobs and increasing aggregate demand. In case no one noticed, it was a collapse in Private spending, (aggregate demand) that triggered the current problems.
The idiotic austerity plan they now have kills growth, drives up unemployment, creates more poverty, shrinks GDP and reduces government revenue. ( increasing annual deficits )
Germany has lost it's collective mind. This is the 2cnd largest export economy in the world, with the vast majority of its exports going to Europe.
Regardless of this fact, they are intentionally making other countries poorer, shrinking their economies and increasing their unemployment.
Who do they think are going to import their exports ?
Greece and the others need to default, leave the EMU get back their currency sovereignty and re-structure their obligations.
The path they are now on can only end in disaster and un-needed hardship for all their citizens.
Of course that would inflate the Euro, and the well-off countries do not want that. Especially Germany, who as you say is the big beneficiary of the status quo.
Reminds me of the rich austerians wanting no stimulus here in the US!”
They will just have to bite the bullet and ride out the economic storm.
However, if they go for this one "economic" government idea....I doubt it will work out in the long run.
As has been mentioned, too many countries with different cultures, languages, financial needs, and quirks PLUS nationalism in each country.
If they break up the Euro, Europe (and the world) will suffer economically for a while.
If they stay together, they will suffer and have constant problems indefinitely.
It is one thing to plan something.....put it down on paper.....and it is another thing to actually DO it.
No matter what happens, the Euro "experiment" is going to end badly.