The Unthinkable Is Now Inevitable

The Euro is going down. Not with a whimper but with a bang. A trillion dollar bang.

Mrs Merkel is right: "The euro is in danger... if the euro fails, then Europe fails." What she has not yet admitted publicly is that the main cause of the single currency's peril appears beyond her control and therefore her impetuous response to its crisis of confidence is doomed to fail.

The euro has many flaws, but its weakest link is Greece, whose fundamental problem is that for years it spent too much, earned too little and plugged the gap by borrowing in order to enjoy a rich man's lifestyle. It flouted EU rules on the limits to budget deficits; its national accounts were a moussaka of minced statistics, topped with a cheesy sauce of jiggery-pokery.

By any legitimate measure, Greece was unworthy of eurozone membership. That it achieved card-carrying status was down to the sleight-of-hand skills of its Brussels fixers and the acquiescence of central bank bean-counters. Now we know the truth, jet-hosing it with yet more debt makes no sense. Another dose of funny money will delay but not extinguish the need for austerity.

This is why the euro, in its current form, is finished. The game is up for a monetary union that was meant to bolt together work-and-save citizens in northern Europe with the party animals of Club Med. No amount of pit props from Berlin can save the euro Mk I from collapsing under the weight of its structural dysfunctionality. You cannot run indefinitely a single currency with one interest rate for 16 economies, when there are such huge fiscal disparities.

What was once deemed unthinkable is now, I believe, inevitable: withdrawal from the eurozone of one or more of its member countries.

The welfare state as we know it is unsustainable. I suppose I'm going to need some back up for such a broad statement. I have it.

How about this: Europeans Fear Crisis Threatens Liberal Benefits.

Across Western Europe, the "lifestyle superpower," the assumptions and gains of a lifetime are suddenly in doubt. The deficit crisis that threatens the euro has also undermined the sustainability of the European standard of social welfare, built by left-leaning governments since the end of World War II.

Europeans have boasted about their social model, with its generous vacations and early retirements, its national health care systems and extensive welfare benefits, contrasting it with the comparative harshness of American capitalism.

Europeans have benefited from low military spending, protected by NATO and the American nuclear umbrella. They have also translated higher taxes into a cradle-to-grave safety net. "The Europe that protects" is a slogan of the European Union.

But all over Europe governments with big budgets, falling tax revenues and aging populations are experiencing rising deficits, with more bad news ahead.

With low growth, low birthrates and longer life expectancies, Europe can no longer afford its comfortable lifestyle, at least not without a period of austerity and significant changes. The countries are trying to reassure investors by cutting salaries, raising legal retirement ages, increasing work hours and reducing health benefits and pensions.

"We're now in rescue mode," said Carl Bildt, Sweden's foreign minister. "But we need to transition to the reform mode very soon. The 'reform deficit' is the real problem," he said, pointing to the need for structural change.

The reaction so far to government efforts to cut spending has been pessimism and anger, with an understanding that the current system is unsustainable.

And yet under our Glorious Leader, in this crisis our government has moved in the direction that sunk Europe. One way or another it will not last.

Cross Posted at Power and Control

posted by Simon on 06.10.10 at 01:16 PM










Comments

If the Euro falls, what changes? The pan-European EU government is still in power, and they're still as kleptocratic, opaque, and totalitarian as ever.

Bob Smith   ·  June 10, 2010 6:59 PM

The Euro will not fail because of Greece.

It may very well fail because of the politicians who decided to support Greece to prevent a default.

It was only about a month ago that they put together a "rescue" fund. It consisted of about 800B Euros of promises. And every week since then matters have deteriorated.

Why not just announce the rescue fund was ten times as large, 8,000B Euros? Since they don't have the money what difference would it have made?

Now the ECB is buying up Greek debt that creditors are very eager to sell. And the US Federal Reserve is doing the same. And who else?

Propping up the PIIGS will ruin the Euro. A Greek default months ago would be forgotten by now.

The "rescue" package was political. The leaders were more afraid of political weakness than of fiscal insanity. They chose the insanity but got both ills.

KTWO   ·  June 10, 2010 7:19 PM

What looks very interesting to me is which currency you get for your Euros if it goes away.
I mean, we know everybody will want marks and nobody will want drachmas.

Who decides? I mean, I'm sure they'll say Italians get Lira and French get francs, but what about the Bank or America or Hong Kong banks?

The world will be totally screwed short-term if it happens.

If it starts looking inevitable, look for the more savvy to drop their Euros which would crater its value so the serfs in EUnuchstan will all be Picts.
Screwed, blued and tatooed.

Veeshir   ·  June 11, 2010 12:46 PM

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