There will likely be a lot of thoughts to come with regard to the E.U.’s nearly $1 trillion package of bailout loans, but the most glaring issue is that, despite its enormous size and scope, Europe’s new ‘solution’ misses the root of the Eurozone debt problem and worse yet could be amplifying it.
The underlying problem behind everything is moral hazard. So why are they rewarding it like never before?
The walls of fiscal and economic sovereignty are being breached. The creation of an EU rescue mechanism with powers to issue bonds with Europe’s AAA rating to help eurozone states in trouble — apparently €60bn, with a separate facility that may be able to lever up to €600bn — is to go far beyond the Lisbon Treaty. This new agency is an EU Treasury in all but name, managing an EU fiscal union where liabilities become shared. A European state is being created before our eyes.
No EMU country will be allowed to default, whatever the moral hazard. Mrs Merkel seems to have bowed to extreme pressure as contagion spread to Portugal, Ireland, and — the two clinchers — Spain and Italy. “We have a serious situation, not just in one country but in several,” she said.
Interestingly, Europe’s debt crisis has thus been a boon for those who dream of a single European nation using the euro. It’s now being forced to happen:
The euro’s founding fathers have for now won their strategic bet that monetary union would one day force EU states to create the machinery needed to make it work, or put another way that Germany would go along rather than squander its half-century investment in Europe’s power-war order.
Yet just because some dream of it to happen and it could be forced to happen, doesn’t mean that it’s a sustainable economic structure:
The euro was never an “optimal currency area”, which is to say it was never an “optimal legal and cultural area”. It was a late 20th Century version of the same Hegelian reflex of imposing ideas from above — making facts fit the theory — that has so cursed Europe.
While each component makes sense in its own narrow terms, the EU policy as a whole is madness for a currency union. Stephen Lewis from Monument Securities says Europe’s leaders have forgotten the lesson of the “Gold Bloc” in the second phase of the Great Depression, when a reactionary and over-proud Continent ground itself into slump by clinging to deflationary totemism long after the circumstances had rendered this policy suicidal. We all know how it ended.
We’re not sure if the Euro should be rallying right now, as shown below. Maybe nobody wants to be steam-rolled in the near-term, that’s understandable, but so far it seems like this bailout plan just makes long-term euro weakness vs. the dollar even more likely.
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