Behind the Euro Crisis

8/3/2019 Behind the Euro Crisis

1/4

Love this PDF? Add it to your Reading List! 4 joliprint.com/mag

fnancialsense.com

Whats Behind the Euro Crisis and How WillIt End? | Antony P. Mueller

While the pronouncement of the euro crisishas become a main topic in the newsroomsand while a plethora of pundits hasnt got

tired of predicting the end of the common European

currency, the facts tell a different story. By the end of2011 the euro was quoted higher than its long-termaverage since its inception and the ocial ina-tion rate of the euro zone has been kept under twopercent. The average debt burden of the countriesthat make up the euro-zone is less than that of theUnited States or Japan. What is, then, the problemwith the euro? Why doesnt a day go by withouta headline that says that the euro is doomed andthat it would be only a matter of time until the Eu-ropean Monetary Union and the European Union,

too, would blow apart?

The Origin of the Mess

When the nancial crisis broke out in the UnitedStates in 2008 no commentator showed up to blamethe US dollar as the cause of the housing and -nancial market crisis and to state that the use of acommon currency for a large and highly diverseeconomy such as that of the United States was theroot of the problem. Besides blaming the regulatoryframework as being either too strict or too lose, itwas mainly the monetary policy that was identiedas the origin of the current nancial crisis. A mone-tary policy of extremely low interest rates and ampleliquidity put in place by the US central bank sincethe late 1980s had produced an inated nancialsector. The appetite of investors and lenders forhigh yield risky investments had gotten bigger overthe decades in as much as the US central bank hadacted in a way that hardened the conviction amongnancial market operators that there would be a

reliable bailout guarantee for the nancial systemas implicitly pledged by the American central bank.

In Europe, moral hazard was on the rise when plan-

ning for a common European currency was put inplace in the second half of the 1990s. With the in-troduction of a common European currency camethe belief that because a country such as Greecewould use the same currency as Germany or theNetherlands its sovereign debt would be of equalstanding. Consequently, it did not take long untilbond investors would drive down interest rates ofcountries such as Greece, Portugal, Spain and Italyto the levels of Germany and the Netherlands. Asit was the case in the US where nancial market

operators acted under the delusion of absence ofrisk during the housing bubble, in Europe it wassovereign debt of the euro-zone members that washeld to be risk-free.

In retrospect one can state that the period whichsome economist identied as the Great Modera-tion was in fact closer to being the time of the GreatDelusion. Not much different than the politicians inthe US who acted as cheerleaders for the mortgagebinge in the housing market, governments in Europewere enticed to borrow up to the hilt rstly becauseinterest rates were much lower after they joined theeuro-zone and secondly because borrowing was soeasy given the willingness of bankers and investorsto lend as much as they could in the belief that theinvestment in bonds of the members of the euro-zone of the Southern periphery would be lucrativeand safe (see chart)

12/30/2011

http://ww

w.fnancialsense.com/contributors/antony-mueller/2011/12/30/whats-behind-the-euro

-crisis-and-how-will-it-end

Page 1
http://joliprint.com/maghttp://www.financialsense.com/http://research.stlouisfed.org/fred2/series/FEDFUNDS?cid=118http://research.stlouisfed.org/fred2/series/MZMSL?cid=30http://research.stlouisfed.org/fred2/series/MZMSL?cid=30http://mises.org/daily/1627http://www.federalreserve.gov/boarddocs/speeches/2004/20040220/default.htmhttp://www.federalreserve.gov/boarddocs/speeches/2004/20040220/default.htmhttp://www.federalreserve.gov/boarddocs/speeches/2004/20040220/default.htmhttp://www.federalreserve.gov/boarddocs/speeches/2004/20040220/default.htmhttp://mises.org/daily/1627http://research.stlouisfed.org/fred2/series/MZMSL?cid=30http://research.stlouisfed.org/fred2/series/MZMSL?cid=30http://research.stlouisfed.org/fred2/series/FEDFUNDS?cid=118http://www.financialsense.com/http://joliprint.com/http://joliprint.com/mag


2/4


fnancialsense.com

Whats Behind the Euro Crisis and How Will It End? | Antony P. Mueller

bad url: http:/www.

fnancialsense.

com/sites/deault/

fles/users/u711/

images/2011/eu-

ropean-yields-inte-

rest-rates.jpg Source

Mismanagement

The simple fact that a country such as Greece didover-borrow and as a consequence had to face de-fault, something which is not new at all innancialhistory, was profoundly misinterpreted by the majorgroups that were the main decision-makers in theunfolding of the Greek tragedy. When it becameevident that Greece encountered diculties at rol-ling over its debt, the prospect that Greece would

default was vehemently negated right away as arational option. Of course, Greece wanted to avoiddefault and in this aim it was joined by its lenderswho obviously also did not want Greece to defaultand obviously so preferred a bailout as well. Thesetwo self-interested groups got prompt support bymembers of the highest echelons of the EuropeanUnion. By this party of three the stage was set toturn the Greek drama rst into a farce and theninto Greek tragedy.

The proper way to resolve the Greek debt problemwould have been to let Greece and its bankers maketheir deal and have them work out a reschedulingagreement without a direct European involvement.

Yet things took their turn to disaster when politi-cians of the euro-zone announced that Greece mustget a bailout because no euro member state shouldever default. This was an absurd allegation and itdid not take long until nancial market operatorssensed that the day had come to speculate againstthis false and pretentious claim.

When the sell-off of Greek bonds began and interestrates for the country began its steep rise, it becamemanifest that Greece would be unable to renanceits debt load that was about to fall due in 2011 andthereafter. Contagion spread to Portugal and Spainand towards the end of the year, Italian interestrates began to skyrocket as well. Severe shock waveswere sent across Europe and beyond when in late2011 even Germany and France had to struggle to

renance their public debt. The main credit ratingagencies announced that the standing of the coreEuropean economies would be under review fora downgrade as it was already done for a series ofsmaller countries of the euro-zone.

A major factor for the crisis to spin out of controlwas the disorder that ruled when the crisis began.Serious doubts arose about who would effectivelybe in charge if a member of the euro-zone shouldencounter severe payment problems with the pros-

pect of default. The straightforward rule, which waslaid down in the Maastricht treaty for the EuropeanMonetary Union, namely that each country was res-ponsible for its own debt and that there would beno bailout guarantee by the Union, was discardedwithout necessity and carelessly replaced by a de-claration of solidarity.

Members of the executive branch of the EuropeanUnion, the European Commission, pushed aheadwith the demand of assisting Greece with fundsfrom the European Union which in essence meantthat it was up to the solvent countries of the euro-zone to come up with the money. Germany, whichwould be the main paymaster for Greece and theother countries in need for nancial aid, was notamused. The divergence among the major Euro-pean decision makers provoked a loss of condenceamong nancial market operators concerning notonly the payment ability of individual countriesbut also regarding the euro itself and nally theEuropean Union as institution.

12/30/2011

http://ww



Page 2
http://joliprint.com/maghttp://www.financialsense.com/http://www.mygovcost.org/2011/12/28/the-euro-in-retrospect/http://www.mygovcost.org/2011/12/28/the-euro-in-retrospect/http://www.mygovcost.org/2011/12/28/the-euro-in-retrospect/http://www.mygovcost.org/2011/12/28/the-euro-in-retrospect/http://www.mygovcost.org/2011/12/28/the-euro-in-retrospect/http://www.mygovcost.org/2011/12/28/the-euro-in-retrospect/http://www.mygovcost.org/2011/12/28/the-euro-in-retrospect/http://www.mygovcost.org/2011/12/28/the-euro-in-retrospect/http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165http://eur-lex.europa.eu/en/treaties/dat/11992M/htm/11992M.htmlhttp://eur-lex.europa.eu/en/treaties/dat/11992M/htm/11992M.htmlhttp://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165http://www.mygovcost.org/2011/12/28/the-euro-in-retrospect/http://www.financialsense.com/http://joliprint.com/http://joliprint.com/mag


3/4


fnancialsense.com


Crisis Without a Cause

The simple fact that a relatively small country suchas Greece had payment diculties and would be inneed of rescheduling its debt transmogried into theso-called euro crisis. It would not take long andthe nancial press and its favorite pundits wouldpronounce that not only the common European cur-rency would be close to its end but the European

Union as well.

If the European authorities had declared -- in trueconcordance with the Maastricht Treaty -- that Greekdebt is a Greek problem, no euro crisis would haveoccurred. There would have been a Greek debt crisisand bankers would have had to pay their so-calledhair cut and the interest rates for Greece wouldhave been considerable higher than before. Greekdebt payments would have been extended to thefuture in a rescheduling agreement, the Internatio-

nal Monetary Fund (IMF) would have provided anemergency loan, and some other countries, such asGermany and France would have provided extrafunding. Like in so many instances before, wheneconomies had debt problems, the IMF would havetaken over the supervision of the restructuring andthe implementation of an adaptation program. Inother words: all that we currently have with theEuropean bailout would also have happened wi-thout the European bailout albeit with the majordifference that no-one would speak today of theeuro crises and only about a Greek debt crisis.

The interventionist hyperactivity of politicians, par-ticularly at the top of the executive branch of theEuropean Union who, so it appears, were followingthe rule of all power grabbers never to let a crisis goby without using it as an opportunity for extendingdominance was surely a major factor in turning arelatively minor problem into one that threatensthe stability of the global nancial system and hasbeen prone to cause mind-boggling havoc for the

people of Europe if indeed the euro zone were tofall apart.

Transformation of the Eurozone

All the while when politicians and governmentswere arguing and disagreeing in dispute, an ava-lanche of self-declared experts on European mattersshowed up to offer one dark scenario after the other.

A dedicated consumer of nancial news soon wouldhave gained the conviction that the Maya predic-tion of the end of the world in 2012 was nothingcompared to the end of the euro and the EuropeanUnion. Yet while sinister ink was spilled, the ex-change rate of the euro held up well and economicgrowth did not falter in the main economies of theeuro-zone. Germany, which represents the largestEuropean economy, experienced the year 2011 asone with steady growth, low interest rates, and adeclining unemployment rate. While the pundits

were struggling to outcompete each other puttingforth one worst case after the next, reality took adifferent path.

Different from the scenario in which Greece wouldhave settled its debt problem without a deep invol-vement of the European Union, the actual path thatwas taken has transformed the euro-zone into agenuine scal union. Did the authorities get whatthey wanted? That is it, after all, how bailouts work.Can one truly exclude the hypothesis that maybe itwas the intention of some decision-makers at thetop echelon of the European Union to take the Greekdebt troubles as an opportunity to push the Euro-zone towards a scal union? Anyway, as a conse-quence of the Greek debt debacle, chief additionalEuropean nancial institutions were establishedwhich for the time to come will band the membersof the Eurozone closer together at the cost of leavingsome other members of the European Union, likethe United Kingdom, in isolation.

12/30/2011

http://ww



Page 3
http://joliprint.com/maghttp://www.financialsense.com/http://www.investopedia.com/terms/h/haircut.asphttp://www.independent.org/store/book_detail.asp?bookID=94http://www.independent.org/store/book_detail.asp?bookID=94http://www.investopedia.com/terms/h/haircut.asphttp://www.financialsense.com/http://joliprint.com/http://joliprint.com/mag


4/4


fnancialsense.com


On May 9, 2010, the 27 members of the EuropeanUnion set up the European Financial Stability Fa-cility (EFSF) as a vehicle to provide nancial assis-tance to member states. The EFSF is allowed to bor-row up to 440 billion while theEuropean FinancialStabilisation Mechanism (EFSM) as an emergencyprogram may raise up to 60 billion euros which areguaranteed by the budget of the European Union.A veritable scal union was practically created on

December 9, 2011, when the member states of theEuropean Union, with the exception of the UnitedKingdom, agreed upon strict limits for governmentspending and borrowing including mechanisms ofsanction in the case on non-compliance. On Decem-ber 20, 2011, the European Central Bank (ECB) tookits dubious prognosis of an imminent liquidity cri-sis as the pretext to assume the role as a genuineLender-of-the-Last-Resort for the euro-zone whenit offered 489.2 billion euros for the banking sectorof the euro-zone as the rst of a two part operation

to augment liquidity and to animate banks to buybonds of the troubled euro-zone countries.

With the new institutions and the action of the ECBa profound transformation of the European Unionhas taken place. With the EFSF and the EFSM -nancial stability has moved from being a nationalconcern into the authority of the European Union.With the scal pact, member countries of the Euro-pean Union (other than the UK) have given up theirsovereignty over their national budgets. Finally, ma-king the round complete, the ECB has taken overcomprehensive authority to act as the eurozonesLender-of-the-Last-Resort.

The crisis has not weakened the position of the com-mon European currency but fortied its institutionalframework.

Conclusion

As much as the euro crisis became more severe, italso became clear that there is no reasonable alter-

native to a common currency in Europe. A returnto national currencies would not resolve the basic

problem that modern economies face. The root ofthe trouble is not the currencyper se but a nancialsystem based on fractional reserve banking, which,in combination with the modern warfare-welfarestate drives towards an unremitting expansion ofstate activity and debt burdens.

Yet the true nature of the current crisis is not thatof a currency, be it the euro or the dollar, but the

symptom of fundamental problems of the structureof modern democracy and its monetary system. Thescal pact is an attempt to stand against the tide ofdebt expansion. It is hard to see how the goal couldbe reached. As long as we continue to maintain amonetary system of fractional reserve banking incombination with state money and a welfare-war-fare state, the pattern of perilous booms and bustswill not vanish.

12/30/2011

http://ww



Page 4
http://joliprint.com/maghttp://www.financialsense.com/http://www.efsf.europa.eu/about/index.htmhttp://www.efsf.europa.eu/about/index.htmhttp://ec.europa.eu/economy_finance/eu_borrower/efsm/index_en.htmhttp://ec.europa.eu/economy_finance/eu_borrower/efsm/index_en.htmhttp://ec.europa.eu/economy_finance/eu_borrower/efsm/index_en.htmhttp://www.ecb.int/press/pr/date/2011/html/pr111216_1.en.htmlhttp://www.cato.org/pubs/journal/cj4n1/cj4n1-12.pdfhttp://www.cato.org/pubs/journal/cj4n1/cj4n1-12.pdfhttp://www.ecb.int/press/pr/date/2011/html/pr111216_1.en.htmlhttp://ec.europa.eu/economy_finance/eu_borrower/efsm/index_en.htmhttp://ec.europa.eu/economy_finance/eu_borrower/efsm/index_en.htmhttp://www.efsf.europa.eu/about/index.htmhttp://www.efsf.europa.eu/about/index.htmhttp://www.financialsense.com/http://joliprint.com/http://joliprint.com/mag

Behind the Euro Crisis

Documents

Transcript of Behind the Euro Crisis