GIVEN THAT DEBT IS BASICALLY JUST A WAGER ON A NATION'S FUTURE....

Europe at the Abyss (Robert Samuelson, 5/30/11, RCP)

Some causes of Europe's plight are well-known: the harsh recession following the 2008-2009 financial crisis; aging populations coupled with costly welfare states. But there's also another less recognized culprit: the euro, the single currency now used by 17 countries.

Launched in 1999, it aimed to foster economic and political unity. Economic growth would improve. Costly currency conversions would cease; money would flow smoothly across borders to the best profit opportunities. Using euros -- and not marks or lira -- Germans, Italians and others would increasingly consider themselves "Europeans." For a while, it seemed to succeed. In the euro's first decade, jobs in countries using the common currency increased by 16 million.

It was a mirage. The euro helped create the crisis and has made its resolution harder, as a new report from the International Monetary Fund shows. For starters, the euro fostered a credit bubble that led to booms in housing, borrowing and consumer spending. When each country had its own currency, the country's central bank (its Federal Reserve) regulated local interest rates and credit conditions. With the euro, the European Central Bank (ECB) assumed that job. But one policy didn't fit all: Interest rates suited to Germany and France were too low for "periphery" countries (Greece, Ireland, Portugal and Spain).

"Financial markets" -- private investors -- compounded the problem by assuming that the euro's creation reduced risk. Weak countries would be protected by the strong. Money poured into the periphery countries. There was a huge compression of interest rates. In 1997, rates on 10-year Greek government bonds averaged 9.8 percent compared to 5.7 percent for similar German bonds. By 2003, Greek bonds fetched 4.3 percent, just above the 4.1 percent of German bonds.

"The markets failed. All this would not have occurred if banks in Germany and France had not lent so much," says economist Desmond Lachman of the American Enterprise Institute. "It was like the U.S. housing market." Both American and European banks went overboard in relaxing credit standards.

Now that the credit bubble has burst, the euro impedes recovery. One way countries revive from financial crises is by depreciating their currencies. This makes exports and local tourism cheaper, creating some job gains that cushion the ill effects of austerity elsewhere. But latched to the euro, Greece and other vulnerable debtors forfeit this safety valve.

Greece's debt is now approaching an unsustainable 160 percent of its annual economy (gross domestic product).

...and that Greece's fertility rate is at 1.5, what is the point of trying to rescue them? Leave them on the ice floe and trudge along.

Posted by oj at May 30, 2011 8:53 AM
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