Curse of Debt (4) - Leaving the Euro

Many commentators assume that Greece will have to leave the Euro. They do not understand how costly such a move would be. Here are some of the problems they would face.

• The Greeks will lose the benefits of free cross border trade. Being able to buy and sell in other parts of Europe is a huge advantage for most businesses.

• An alternative currency would have to be established. If this could not be done quickly, a massive disruption of economic life would occur.

• The powerful people would get their wealth out of the country, before the new currency devalues. This flight of capital would cause huge shortfalls of capital.

• The new currency would rapidly depreciate in value, which would destroy all wealth.

• People living off their savings would be plunged into poverty.

• The price of imported goods would rise dramatically.

• The local banks would collapse, as their capital disappeared. A new banking system would have to be established.

• Businesses would have difficulty getting loans to funds the on-going operation of their businesses.

• The economy would be weakened significantly.

The political powers understand these costs, so they will do whatever they can to prevent this from happening. They may eventually fail, but they will not give up in a hurry.

The long-term trend is towards decentralisation, so the Euro will eventually collapse, but the politicians will hold it back for a long time.

Curse of Debt (3) - Collapse of the Euro

Over the last year, economists and political commentators have been writing the obituary of the Euro. They claim it is about to collapse and disappear. This has not happened yet, and it may not happen for a long time.

Political power usually trumps economic reality.

Many of the members of the EU have built up high levels of debt, as politicians borrowed to pay for political promises that they could not afford. When interest rates were low, the burden was just bearable, but now interest rates are blowing out, the load is too heavy to bear. We could be forgiven for expecting them to default on their debt.

European banks have lent huge amounts to countries who could not afford. That practice would usually lead to the banks taking a huge loss when their clients default.

However, the politicians do not want that to happen. They will come up with all sorts of solutions to prevent economic conditions from become the economic reality. None of the solutions will solve the problem, but they will keep things going until a better political solution can be put together.

If the situation gets really bad, the politicians will force the ECB into quantitative easing (the economically correct name for printing money). This may lead to massive inflation, but politicians have always preferred inflation to spending cuts as a tool for eliminating debt.

Modern banking system and modern money systems are rotten. They will eventually collapse, but do not hold your breath. Political power will need to collapse first.

The Euro

Many economic commentators are already writing the obituary of the Euro. Some suggest that a currency union cannot survive without political union. This is not correct. What happens in a currency union is that individual governments lose the power to deflate their currency. They can no longer borrow and spend, and then inflate away the debt (California cannot do this either).

Politicians hate losing this power, because they can no longer buy votes without having to pay the price. Most citizens should be glad that their politicians have lost this power. Image the damage that Arnie could terminate, if California could inflate away its debt.

The real problem in Europe is that credit rating agencies and banks foolishly assessed the risk of default as being the same for all members of the European Union. German and Greek bonds were priced the same. This allowed the poorer countries of Europe to borrow at very low interest rates and spend like there is no tomorrow. It is now clear that the risk of lending to Greece and Spain is far greater than lending to Germany, so bond yields have adjusted to reflect the difference.

This coming home of the chickens leaves the so-called PIIGS in a difficult situation. They can no longer inflate their way out of trouble and they can no longer borrow freely at low cost. However, leaving the Euro is not really an option. They would face the costs of establishing a new currency, and will not be able borrow at all. The populations of parts of Europe will face a few hard years and the politicians will not be able to buy their votes.

The bad risk assessments have left the European banks with a serious problem. They have only just swallowed the American subprime debt and now they have to deal with the falling value of European sovereign debt. However, the ECB is coming to the party, and is buying up some to the poorer quality debt. They will not allow the European banks to follow. Part of Europe may experience hard times, but the Euro will not fail.

The other consequence of the economic crisis is that political union is finally off the agenda. The chances of the Germans and Greeks, or the Dutch and the Spanish giving their political independence to each other has dropped to zero.

This creates a problem for the end-times prophets who have backed an eschatology based round a United States of Europe. They will have to go back to the scriptures and re-write their charts. Anyway, who needs a United States of Europe when we have a United States of America trying to manage the world.