Columnist Robert Samuelson slapped a kiss of death on the failing eurozone economy. He wrote in The Washington Post last week that a currency system promising so many benefits when the euro was launched in 1999 has produced the opposite. “What is the solution?” he asked. There is no solution. Europe faces choices, some bad, others worse, Samuelson concluded.
The outcome of the Greek national election on Sunday might be the trigger to begin the process of weak European Union members abandoning the euro currency system. It is expected that the Greeks won’t vote to continue unpopular austerity programs. A front-runner political party pledges to rescind cutbacks in social welfare and other budget limits, thus reneging on bailout loan obligations to cut government spending. Without the loans, the nation is insolvent.
The return to a Greek sovereign currency will create a run on the banks and a devaluation of at least 50 percent, some analysts predict. What’s worse is the first crack on the euro system will spread to bank runs in the other weak nations — Portugal, Ireland and Spain. It would start a financial crisis cycle in a global economy already in a slide back to recession.
Softening the EU austerity plans requires borrowing, Samuelson notes. Who would lend? Issuing eurobonds has been an option, but Germany strongly opposes. Since the bond guarantor would be the collective EU group, Germany is the most likely to be stuck with a default. France, with a new socialist government, is not likely to improve its fiscal reliability if it resumes its social welfare benefits.
The recent decrease in value of the euro jarred foreign sovereign reserves (primarily Asian) that had been slowly replacing dollars with euros for diversification. Any withdrawal of a member from the euro currency system would surely depress the exchange rate further. With the global economy still fragile from the extended recession, loss of confidence in the euro would be harmful.
Responding to the current eurozone crisis, The Economist cover story this week featured a sinking ship (tagged as "the world economy") with the caption, “Start the engines, Angela.” It is a pointed rebuke of German Chancellor Angela Merkel’s stubborn resistance to more bailout funding of troubled EU nations, Greece and Spain specifically.
Among the editorial comments on the eurozone crisis are references to the fate of the world economy being in the hands of one woman, Merkel. The newsmagazine criticized the half-backed rescue plans that failed to get leadership support and refused to lay out a clear path for central banking integration required for survival of the single currency. Issuance of eurobonds, guaranteed by all 17 eurozone members, has been put down by Merkel.
Partial relief of the stress on global financial markets was announced last week by the finance ministers of the 17 eurozone countries in the form of a $125 million loan to Spanish banks. This won’t solve Europe’s debt crisis and double-digit unemployment, noted The Associated Press. It will help the banks that are crushed under the weight of bad real estate loans. Does that sound familiar?
This commentary is the seventh one since I began to observe the eurozone fiscal problems in 2008 as global recession was looming. There has always been an optimistic outlook for the future and benefits of the European currency, but the politics behind an economic bloc controlling one-fifth of the global economy has been rocky. The current debt crisis is the first major crack in the wall indicating EU member withdrawals from the euro currency system.
Hindsight is always so revealing but not always helpful. The British Labor Party under the leadership of Tony Blair is a case in point. Although a charter member of the European Union, Britain opted out of the euro currency system and retained its sovereign pound sterling.
No doubt there were many reasons for that decision, but uppermost is British disassociation with the continental governments, both political and economical. I recall friends in England resenting being called “Europeans” or references to England as “Europe.” We are the United Kingdom of Britain, they claimed.
The English pound has retained its global importance in trade and finance and kept the British government out of the eurozone fiscal bickering and bailout responsibility. But the current Conservative Party has its own internal problems with unemployment, immigration and home rule defiance.
Ford is a freelance writer located in San Diego. He can be reached at johnpatrick.ford@sddt.com.
Press ESC | Close [X]
