Friday, August 5, 2011

The Euro is in Critical Condition and Has Been Placed in Intensive Care


Even If It Recovers, It Will Never Be the Same



That is one sick currency
and its not even green


The Euro, the single currency of the European Economic Community is failing.  To understand why, a short history of post WWII Europe is required. 

After WWII, with Europe almost totally destroyed the leaders felt there had to be a better way.  They looked to the United States and saw a country that had two major advantages that Europe lacked.  (not including hosting two World Wars, which doesn’t give the host any advantages. 


One of the most brilliant ideas in the U. S. Constitution was the provision that preventing any one state from enacting trade barriers to commerce with any other state.  In effect, in 1789 the United States became a common market and as it got larger the common market got larger.  Because the market for products and services produced in any one location is the entire country, the U. S. ultimately became the world’s
strongest and richest economy.

Have we got some great ideas! Tell Newt Gingrich
The second brilliant idea in the founding of the U.S. was a common currency.  This meant that no state or region had to worry about making payments or accepting payments in anything other than dollars.  Again the result was economic growth and increases in wealth and income beyond anything that Europe, a much older region was ever able to obtain.


So Europe emulated the United States, and has become a common market with a common currency, (although there are exceptions to the currency thing, notably Britain and Switzerland.)  And therein lies the problem., greed, which is almost always the problem.


Tell Us Again Why We Let Them In

One country in the Euro was Greece.  It did not have a particularly strong economy, and it had a bloated and inefficient government which operated all sorts of businesses it should not have.  To survive, Greece had to borrow money.  And since they were on the Euro, and since Greece was willing to pay higher interest rates than more stable countries such as Germany, banks rushed to loan Greece money.  A lot of money, a while lot of money.


Now Greece cannot pay back the banks because they have no Euro’s to pay the banks back with.  Portugal and Ireland, along with Greece have had to be bailed out by Europe’s stronger nations.  And here comes Italy and Spain.  Italy has a dysfunctional government and looks like a future basket case. Spain has a highly depressed economy and looks like a current basket case. 

So in order to save the Euro, Germany and France, its two large participants may have to destroy it.  Greece, Spain and Italy may be asked to leave.  The divorce will be messy, the acrimony severe, and like any bad divorce after it is over all of the parties may be worse off.  Certainly Greece and Italy and Spain will suffer large economic declines.

The alternatives:  One is to ask the taxpayers of France and Germany to continue to support their weaker neighbors, and French and German taxpayers are like to say, thank you but no.  (and probably not be that polite about it)  A second alternative is the abandonment of the Euro altogether. 


The Selection of Good Choices for the Future of the Euro

So the best outcome, which is restructuring by asking a bunch of countries to leave is a bad outcome. The next best outcome, continued taxpayer bailouts is a worse outcome, and the worst outcome, total abandonment,  is the worst outcome.


What about a good outcome?  That item is out of stock and not even on back order.

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