If the mode of cleaning involves sweeping the mess under the carpet, actual cleaning has not occurred and, thus, exposure to stink and the risk of rot will be greatly increased.
Crackerjack Finance posted a good summary of the issues in this post, Eurozone Break-up (hat tip, Abnormal Returns). Essentially, the Euro mechanisms were flawed from the outset, yadda yadda, consequences of aligning monetary policy not thought through, yadda yadda, credit default spreads on the PIIGS have widened, yadda yadda, flawed construct. The rest of the post goes on about side effects, all of which seem in the realm of possibility.
I do take issue with his one quote:
With 17 disparate economies in the Euro-17 (the countries which have adopted the Euro), it never made sense to rely on centralize monetary policy from the ECB.
When cleaning up any mess whose growth rate outpaces the cleaning efforts, start with eliminating that force that is propagating the growth. Then, when that force is eliminated, turn to eliminating the mess.
In a previous post, I’ve alluded vaguely that, in all likelihood, the Euro is going to collapse. Allow me to expand.
In ancient times (i.e. early part of last century), most major currencies were pegged to gold. A piece of paper with the King’s face on it represented a claim to a certain amount of gold held by the Treasury. Although you technically couldn’t do it, the government theoretically owed the paperholder the applicable units of gold.
Nowadays, currency systems are based on fiat money – money that has value only by government law. The strength of the fiat money is tied only to the strength behind the government’s words. Generally, fiat-money loses value once the issuing government refuses to further guarantee its value through taxation. Or to take it one step further, the tax-bearing capacity or propensity of the government and/or its citizens. Had Greece its own currency, it would have depreciated given capacity issues (the benefits of this are easily easily apparent: the real value of Greek debt would fall, Greek exports would bounce back, Greece could possibly default and hit up its lenders with credit losses, etc.). The US dollar’s long-term viability as a reserve currency is threatened, I believe, in part because of that nation’s legislative branch’s new found propensity to play around with the executive’s ability to raise taxes (#1 on the list of answers to why the US deserved to lose its triple-A status).
The Euro pushes the boundaries of fiat money as far as they can go. There is no Europe that backs the Euro but its largest constituent members, Germany and France. There is no central governing body with the political will to restore the Euro’s standing. If the Euro is going to be fixed, then addressing this imbalance is step #1 before any other steps can plausibly be implemented to cleaning up the mess.
The US dollar relies on three pillars: US Fed + US presidency (executive) + US Congress (legislative). The Euro is more like US Fed (i.e. ECB) – US presidency + 50 governors – US Congress + 50 state legislatures.
If something cannot go on forever, it will stop.
The current situation is that the Germans are underwriting the Greeks. All plans are being devised to prevent the Greeks from defaulting on its debt (probably because most of the lenders are German banks and it would not be kosher to hit them up with losses). Plans can essentially be reduced to the following 3 principles: (i) impose austerity (sideproduct: further weakening the Greek economy), (ii) improve tax collection (sideproduct: further money out of the Greek citizens’ pocket) and (iii) no debt write-offs (sideproduct: its going to take forever to repay). The end result of this three-pronged approach is a weak Greek economy that will face heavy debt burdens in perpetuity (or what seems like forever). These measures are nothing more than sweeping the mess under the rug.
In the last precedent to the Greek situation that immediately comes to mind, the solution involved God himself telling Moses to forgive the debts of the Jews. Any long-lasting solution to the Euro is likely to be as drastic and will begin with correcting the political imbalance. When it comes to this, Europe is at fork in the road. Turning right involves breaking up the Euro (and likely or possibly the E.U.?) and each nation turning inward. Turning left involves a comprehensive political solution, likely in the form of integration and possibly modeled after the Canadian political system – a federation with powers divided between the central government and the constituent states.
I have no idea which is the more probable outcome. All I venture to guess is that the uncertainty surrounding the Euro will continue indefinitely until Europeans get real serious about their stillborn political system. As a side note, when integration has been on the ballot, it seems like certain European people reject further integration.