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April 11, 2011
Doom? The Eurozone Is On The Brink?
More and more member nations need bailouts.
At some point, the wealthy can't cover for the poor.
This was always a ridiculous idea. As this article notes obliquely, some states in Europe have had a drunken-sailor attitude about debt -- just spend until you run out, declare bankruptcy, accept a few years of austerity, limp along again -- and some, notably inflation-sensitive Germany, are committed to fiscal solvency.
The Eurozone supposedly unites all these countries economically, but these are not in fact inferior states subject to federal authority as in America, were the government can bring all states on to the same basic page (for better or for worse-- lately, worse).
The states that like to borrow and spend can keep on doing so. It's just that the consequences of their imprudence wind up to be largely a problem of Germany, which then, of course, just encourages them to keep doing it.
Until Germany's tapped, too.
Very worst of all worlds scenario going on here.
Recently, I asked a well-placed minister what plans had been put in place in case the eurozone started to unravel. He just looked at me blankly: “That’s not going to happen. There is too much political will behind the euro for them to let it go.” In other words, the Cameron Government shares the same complacent analysis as the European political class: this is not a real problem, we’ll muddle through somehow, it’s all the fault of the speculators, etc etc.
This is denial. The simple truth is that Greece, Ireland and Portugal are all bankrupt. Perhaps it is worth spelling out exactly what this means: however hard these countries try, and whatever austerities they impose, they will never, ever be able to pay off their debts.
In itself, this is not much of a problem – Greece and Portugal (though not Ireland) have gone bankrupt many times before, and always recovered. The tried and tested response is to default, then reschedule debts by reducing coupons (ie interest payments) and extending maturities, while allowing the national currency to depreciate so that the economy can once again become competitive.
Their membership of the eurozone, however, means that none of this can happen. There has, until recently, been an absolute determination in Frankfurt and Brussels that no European country should default. The reason for this is sobering: many leading European banks have massive exposure to the sovereign debt of these troubled countries.
Were Portugal or Greece to acknowledge formally that they are bankrupt, the big banks would have to come clean with investors about the true value of these loans. As a result, massive sums would have to be written off on the balance sheets of many of European banking’s most famous names, sending some spiralling towards bankruptcy. Even those that survived would have to cut back the scale of their operations sharply, thus curtailing lending to individuals and businesses. This, in turn, would damage business activity and send Europe yet deeper into recession.
Strapping yourself to drowning men is rarely a wise course to stay alive at sea.