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| Wed Aug 15 22:37:13 2012 Eurozone |
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| Wed Aug 15 22:37:13 2012 Eurozone How long will the Euro last? |
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| There has been a litany of bad news lately for the Eurozone.
For one thing, most Eurozone countries have had a crappy Q2, with many countries (particularly the most vulnerable such as Spain and Portugal) seeing a contraction. In general, people fear that a second recession may be about to hit the Eurozone. Greece is sputtering along. It barely avoided bankruptcy in its latest bond (treasury bill) sale, but also saw a contraction of over 6% in the second quarter. However, it is failing to keep up with fiscal reform promises it made in March, and is now asking for a two-year extension to meet bailout terms. What are the odds the Eurozone will survive? Personally, I think several countries (Greece and Portugal) are likely to leave on their own accord, and other countries (Spain) may be kicked out. The core of the Eurozone (countries using the Euro as currency) may remain--Germany, France, and others--but several countries will and should leave. Greece and Portugal have historically spent far more than they earned ( Portugal's record and Greece's record), and have usually devalued their currencies as an effective extra tax to catch up. Now that they are tied to the Euro, this extra taxation source has dried up, and their deficit spending can't be financed. In fact, instead of the ability to devalue their currency to raise money, Greece and Portugal are being hit with austerity measures instead. In a recession, this just makes the problem worse. Portugal is very upset about this, and rightly so. What do Greece and Portugal gain by staying in the Eurozone for the next 5-10 years? Nothing. In fact, staying in the Eurozone will probably push them into years of economic stagnation. I think Greece and Portugal are foolish to stick with the Euro! I'm sure many of them will come to the same conclusion. Over time, I don't see the Euro surviving, for exactly this reason: countries have historically used devaluation as a way to catch up with overspending. Being in the Eurozone denies countries this capability, and they have grown used to it. There is one way the Eurozone could survive: centralize taxation and spending. That is, countries in the Eurozone could not set their own budgets, but would instead send taxes in to a central agency, which would distribute the funds as well. Personally, I don't see that happening, since no country will give up both their tax receipts and their budget discretion. And so, over time, countries will drop out as they feel the need to devalue currencies. I'll give the Euro 10 more years as an independent currency! Comments |
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