The euro is falling relative to the dollar. Whether the common currency withstands this latest threat depends greatly on Spain. The most vulnerable peripheral countries—Portugal, Ireland and Greece — combine for only 6% of euro-zone GDP. When Spain is added to the mix that share rises to almost 20%. Though often lumped into the smaller periphery, it has one foot in the core group of Germany, France and Italy.
The problem is that the monetary union did not equalize labor productivity - the South did not catch up with the North. For linguistic reasons, there is no free migration in Europe that could soften the differences, like in the US. Equalization of social entitlements without parallel equalization of productivity means the eventual bankrupcy of these weaker countries.
What to do?
12 comments:
The problems the weaker countries are having are self inflicted - the EU did not require them to have huge overpaid non-productive government sectors. There will be social unrest if the government tries to cut the fat but what choice do they have, if they have no money to pay and can't borrow in the markets any more either? The traditional solution is to print money (inflate the currency) but the Euro makes that impossible. Greece's idea is to collect taxes which are supposedly being evaded now but they will have no success.
K
MadIvan frightened!
Need more image Argentine bikini Jewess to calm down.
The Germans will pay.
Quite a lot of hay was made in the last few years over the possibility that the ECU might become a reserve currency in its own right. Well we don't have to worry about that now. Frankly the EUSSR should fail and fail catastrophically for relentlessly attempting to turn national cultures into carnival curiosities with no real independent existence.
J as usual is correct. The plan is to have some kabuki theater - the Germans will wail about how the Greeks have to fix their own mess, take them to the edge of default, etc. - all this in the interest of discouraging other EU members from doing what the Greeks have done. Then they will bail them out to protect their precious currency. The one thing Germans fear above all is an unsound currency - the last time their currency was unsound the result was Hitler, the death of millions, a divided country for 40 years. After the war, the moment the currency was strengthened, there was a miraculous economic recovery which has continued to this day. The Germans will never endanger the magical currency that has made Germany rich and peaceful any more than Americans would give up their Constitution as the bedrock pillar of their national identity.
K
Yes, the Germans will let the Greeks start falling into the precipice, then catch them at the last moment.
There is also the possibility that Greece will simply be expelled from the Euro currency board and have to either issue its own currency or use someone else's money.
That would be the unravelling of the EU and the central powers want to expand it.
Greece will never be expelled. This episode will simply serve to reduce the monetary autonomy of the member states, in favour of a centralised authority (ie, Germany).
And who can blame them?
Anon.
Not necessarily. There are only so many countries in Europe that Are compatible with Germany, those countries that are compatible could form a small group and dominate the remaining countries that do not join the small group.
But Ronduck, that is exactly the situation. Germany and France are the central core of the EU and they do operate the whole organization.
My point was that Greece has been erroneously admitted to the core group when it should not have been. Germany could decide to not bail out Greece, and expel them from the ECU currency board even if Greece continues to use the Euro.
Ecuador uses the US dollar, and Ecuador is even more screwed up than Greece, and yet the US does not bail out Ecuador. Germany could decide to let Greece continue in its problems, but not let them have a voice in the management of the currency.
And when I said a core group led by Germany I meant more than just France.
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