The Euro Crisis – Has Anything Changed?
by Elliott R. Morss
The leaders of the Euro countries held meetings late into the night last week. They announced new steps but the UK would not go along. So instead of new rules for the European Union, they had to settle for agreements with individual European countries. What were these agreements and will they ameliorate the crisis?
What They Agreed To
Under exiting European rules, no nation is supposed to run a government deficit greater than 3.5% of its GDP. According to press reports, the new agreements call for more binding restrictions on government deficits. Instead of just getting a slap on the wrist, countries running large deficits will now have to wear a dunce cap and sit in a corner until their deficits are reduced. Will this help?
Reasons for the Euro Crisis
In my recent articles, I have listed the following reasons for the Euro crisis. Until these problems are addressed, the crisis will continue.
1. Locked Into The Euro
The “Latin” Euro members (Greece, Italy, Portugal, and Spain) will not work as hard or be as efficient as Austria, Germany and the Dutch. There has to be an adjustment mechanism for this. Without one, Euros will drain from their countries and they will become totally dependent on foreign largess. Having their own currencies would provide such a mechanism. Their currencies would weaken and thereby adjust for the differences in productivity. But as long as they are locked into using the Euro, their deficits and debts will grow.
2. The Banks? How About Controlling Them?
The Germans believe the “Latin” Euro countries should be disciplined for their indulgent actions. But where did this crisis come from? There had to be buyers for sovereign debt. Back in 2007, would anyone who cared about the value of their investment buy Greek debt? Of course not. It was a very apparent train wreck in the making. So who did? The European banks. They wanted to play the same game with sovereign debt that the US banks did with mortgages. Don’t worry about risk, just buy up Greek debt, package it, and sell it off for hefty commissions. So where are the new restrictions on banks? I have suggested that to keep bank-created global recessions from continuing, depository institutions should not be allowed to trade on their own accounts. Let them stick to managing their own loans. The banks, the real perpetrators of the crisis, get bailed out while countries and their citizens take the beating. Outrageous!
3. Austerity Measures Are Too Tough
Several “Latin” Euro countries have new governments promising even greater austerity. With unemployment rates at 14% or higher in the “Latin” Euro countries, there will be intolerable political unrest, austerity measures weakened and government collapses.
The Euro leaders have done nothing to address the real problems causing the Euro Crisis. It will get worse before it gets better. I conclude with IMF estimates of Latin Euro country government finance needs in 2012 (in bil. €). Any takers?