Europe on the brink, Friedman on the Euro, How the euro could sink the U.S., How the European crisis happened, The future of the Euro, The future of the European Union, The rise and fall of the Euro, U.S. and the European Crisis
The European crisis has been being played out for awhile now. Like the closing minutes in a championship game it has been filled with twist and turns. The teams in this game are called Euro Survivor and Euro Disaster and the stakes could not be higher. In this contest if the first team wins the European Union gets a chance to limp along towards a brighter future; if the second team wins it could be lights out on the Euro and financial disaster for Europe.
The roots of this debacle are easy enough to understand. Politicians used borrowed money to boost their economies and get reelected. Europe’s stragglers, those countries who have had historically lower standards of living, thought joining union was a good chance to catch up. This was a game of catch up played with borrowed money and running on borrowed time. Whether the politicians thought they could put off the day of reckoning until they got out of office or they really believed that they were going to produce stronger economies that would be able to take on the massive debts being incurred is a mute question at this point. The fact is there are reasons the less wealthy countries are less wealthy and pouring money into them won’t change their economic fundamentals.
In the end the countries were like college kids with their first credit cards. The countries in question borrowed more than they could ever reasonably repay. To make matters worse the European central banks loaned them more money to help them pay on their debts. As several economists have put it they have tried to fight a solvency problem (more bills then money) by adding liquidity (loaning more money). Of course as soon as the money from these “bridge loans” is used up the countries are left with even more debt to pay on. Bridge loans are okay if there is something you are bridging to. In these cases the hopes are pinned on austerity programs and labor reforms that are politically unpalatable and likely will not be enough anyway.
Economist Milton Friedman predicted in 2003 that the Euro-zone would collapse in 10-15 years; the reason for his pessimism was simple. The European economies were too different, the societies too far apart and the lacked the kind of unifying common interests needed to be successful. Like a large family, you have the ambitious and industrious as well as the laid back and leisurely. When adult siblings go out on their own it these differences do not matter. If on the other hand all live and work out of the same house the siblings will either have to conform to common expectations or risk falling into chaos. The European Union is a group of siblings being forced to live in a single house and the eventual chaos Friedman predicted is unfolding.
Germany is the economic head of this dysfunctional family and Britain the stepchild. Germany wants to create a stronger union with the power to make the entire family work under the same rules. Additionally it wants the British to be fully part of this folly. Even if you could force all Europeans to live and work as one country, a rather dubious proposition, the differing cultures would still exist. Like personalities, cultures define people and are unlikely to change. Many of the problems are as much cultural as economic or political. It is unlikely there is any kind of government short of a totalitarian regime that could force the kind of economic unity Germany desires. The British, coming from a different tradition then continental Europe, seem to understand this and want no part of some centrally controlled European state.
What does this all mean in the end? Will the stronger European states, especially Germany, continue to carry the weaker ones? Is collapse of the Euro inevitable as Friedman predicted? The answers are becoming more and more evident. It is politically (not to mention financially) unsustainable for Germany to continue to carry most of the financial load. It is also evident that France’s banking system cannot take on anymore and Britain does not want to go down Euro-land rabbit hole. Unless the western economies make dramatic improvement and soon the European Union is bound to either shrink or completely disappear.
Unfortunately it is unlikely the European Union economies can come back quick enough and strong enough on their own; the only hope for a strong European economic recovery is a resurgence of the American economy. On the other hand U.S. banks hold billions of European Bonds; if the Euro collapses it will create another great banking crisis in the United States and drag it down further. Regrettably for both Europe and the U.S., America is unlikely to experience any substantial economic growth under the current leadership’s policies (not to mention it has debt problems of its own).
The only hope at this point seems to be for the European Union to create a smaller Euro-zone and let the weakest countries go bankrupt. This politically unpopular move would create economic chaos but it would stop the bleeding and allow Europe’s economic systems to get on the road to recovery. The other possible scenario, a total collapse of the Euro, would likely result in a European depression the likes not seen since the 1930s. For now the European powers in the form of the troika (the conglomeration of the European Commission, the European Central Bank and the IMF) continue to try to find ways to delay judgement day. Hoping by continuing to push unsustainable loans to insolvent borrowers they can push things off until someone someway can find a way out of their mess. Despite their efforts the possibility that the worse case scenario will come to pass still lingers. In fact it becomes evermore likely as it becomes more and more apparent that the leadership does not have the political will to make the tough choices. In the end no matter how this plays out it will have major implications for both sides of the pond and as well as the world.
That’s my opinion what’s yours?
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