European Union's Damage Control

by John M. Curtis
(310) 204-8700

Copyright May 22, 2010
All Rights Reserved.                                

              Europe’s 11-year high-stakes experiment with its common currency showed signs of cracking as euro disintegrated under the dark cloud of rising debt.  Faced with an economic crisis paralleling the one in the U.S. in 2008, the European Union put the best possible face on an escalating economic crisis.  Down 20% from its 2008 highs, the euro hit a four-year low against the U.S. dollar, before rebounding slightly May 21 on foreign exchange markets.  Given the magnitude of the Greek financial crisis and prospects for more problems with other eurozone countries, the EU went into full-on damage control.  “The markets are trading in real time while the politicians are moving in bureaucratic time,” said Mark Cliffe, chief economist for Dutch-based ING Group, seeing more problems for the euro down the road.  Promising hundreds-of-billions in cash and loan guarantees hasn’t reversed the crisis.

            EU’s financial woes go well beyond Greece’s recent default to the failure of the euro’s one-size-fits-all currency to work equally well in Europe’s less industrialized countries.  Combining Gross Domestic Products into one mega-economic powerhouse, the euro worked well among world currency traders, convincing foreign investors a hybrid currency resulted in one super-currency.  After its launch in 1999, traders bid up the euro quickly to the world’s strongest currency, based on empty promises from Brussels-based European Council.  After all, the EU had no common tax base or treasury from which to assess a real collective GDP.  Boasting about stricter rules for debt, the European Council sold the euro as the world’s premier currency.  For a while it worked, until the over-valued euro drove less industrialized economies into more debt and eventual insolvency.

            Demanding a debt-to-GDP ratio of 3%, Greece now faces a debt ratio of 12.7%, unable to meet its salary and pension obligations.  Greece’s debt promises to get far worse despite austerity measure imposed by the EU.  Sold as an economic engine of prosperity, the euro now forces Greece into economic slavery to the Stuttgart-based European Central Bank.  Greece must beg the German-based European Central Bank for cash, forcing Germany, France and other more prosperous countries to share the debt.  Desperate to stem the euro’s downward spiral, EU finance ministers agreed on “sanctions” for countries, like Greece, Italy, Portugal, Spain, Ireland, etc., that exceed recommended debt ratios.  Economically troubled economies are not in a position to endure more hardship imposed by EU central bankers.  It’s either all-for-one or none-for-all to preserve the euro.

             Sanctioning Greece, already reeling from massive debt and forced to cut government salaries, pensions and welfare programs, surely restarts violent protests in Athens.  While Germany approved the Greek bailout, France hasn’t yet signed on to the 750 billion euro or $937 billion package of cash and loans, designed to stave off a Greek bankruptcy.   Brussels’ European Council and Stuttgart’s European Central Bank are often at odds with sovereign governments, despite presenting a phony unified front.  Fears over the euro’s fate plummeted the value of government bonds and drove up interest rates.  Eurozone banks face the same kind of credit freeze or cash crunch that paralyzed U.S. financial markets in 2008.  Brussels has done some fancy PR to reassure investors that the eurozone will survive its current debt crisis, rattling nerves on both sides of the Atlantic.

            Offering a lucrative bailout package was designed to reassure investors that  Brussels was pulling out all stops to save the euro.  “The markets have been concerned about unilateral action and a lack of solidarity,” said Cliffe, calling the EU’s actions “a smart move, the first time they’ve got ahead of the curve.”  Some economists question whether the EU’s moves are too-little-too-late to reverse an inevitable decline based on the eurozone’s long-term failures.  Europe’s industrialized countries, like Germany, France and Netherlands more easily translated old currencies into euros.  Less industrialized countries with under-valued currencies got short-changed in the 1999 conversion.  Countries with weaker economies eventually couldn’t fund government salaries and pension funds with euros, piled up more debt and eventually ran unsustainable deficits

            EU’s $937 billion Greek rescue package, backed by Germany and France, postpones the euro’s day of reckoning for the immediate future.  Kicking the can down the road buys the EU more time, while it figures out an exit strategy for eurozone countries unable to afford  the euro.  Pending insolvencies in Spain, Portugal, Italy and Ireland pile up more debt and further erode the euro’s value.  Yesterday’s temporary surcease in no way reverse the euro’s continued decline, where Europe’s growing debt harms the sovereign wealth of the eurozone.  “The eurozone cannot survive as it is at the moment,” historian Timothy Garton Ash told BBC radio, predicting more financial problems for the eurozone’s weaker economies.  No amount of bailouts by the ECB changes the heavily leveraged and socialized economies, whose debt burdens threaten to take down the euro.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.