Eurozone Sovereign Debt Crisis Sinks Europ

by John M. Curtis
(310) 204-8700

Copyright September 7, 2011
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           Europe’s 800-pound gorilla related to the survival of the euro continues to sit on the back of the European Union.  Brussels-based European Union has no answer for the 12-year-old experiment with a common currency, hoping, but failing, to promote prosperity across 17 European economies.  Frankurt-based European Central Bank can’t figure out what to do with Europe’s growing sovereign debt crisis, where the Eurozone’s less industrialized countries have collapsed economically, saddling Germany with mountains of bad debt.  “It’s a very tenuous situation,” said Rod Smyth, Chief Investment Strategist at Riverfront Investment Group, admitting that he’s under-weighting his portfolios with European stocks.  “What you need in Europe is exactly what the Federal Reserve Board did in 2008, fund a lot of bonds,” said Smyth, concerned that Germany could secede from the Eurozone.

            Word of Germany and France’s banks losing capital reserves prompted a sell-off in euros and European stocks, raising disturbing fears about the survival of the euro.  German faces a vote in its Constitutional Court about the legality of the ECB buying more Eurozone sovereign debt, adding more toxic liabilities to its balance sheet.  Since the Eurozone began in 1999, Germany was expected the share its wealth with less prosperous nations.  Twelve-years into the experiment, Germany doesn’t want to bailout struggling European economies.  Now that Germany’s closer to recession, it’s doubtful its citizens will agree to taking on more ECB debt.  Since the euro’s value was based largely on the Deutsche mark, it was too expensive currency for less prosperous economies.  Given the heavy welfare burden of Eurozone, countries paying benefits in euros was far too costly.

              Germany, France, Belgium and the Netherlands all hoped the southern European economies to keep pace with the heavily exporting north.  Twelve-years into the common currency, the euro has only worked for Germany, France, Belgium and the Netherlands, whose pre-euro valuations were roughly equivalent to the Deutsche mark.  Germany now has second thoughts about picking up the bulk of the ECB tab for bailing out Europe’s failing economies.  Burdening Germany with too much ECB debt has dragged the economy closer to recession.  German taxpayers have reached their limit of bailing out other Eurozone countries, no longer willing to accept the same austerity measures as more debt-ridden nations.  Unlike the U.S. where there’s a common tax base to the U.S. treasury, the ECB has no revenue stream other that lending out capital at high interest rates.

            If the euro experiment ends, world currency exchanges will have no problems revaluing Europe’s sovereign currencies.  Coining money gives sovereign nations the kind of monetary flexibility not seen when forced to borrow money at high interest from the ECB.  Currency exchanges use the same criteria for valuing currencies based on Gross Domestic Product to debt ratios.  Generally speaking, the lower the debt to GDP ratio, the higher the value of the currency.  While the U.S. has been the most notable exception recently, before the Eurozone sovereign debt crisis, the euro held his own against the dollar.  Now the Europe’s debt is back in the headlines, the euro has dropped in value.  Despite an initial overreaction, ending the euro would have an overall positive impact on European economies.  No sovereign nation should be emasculated by losing its coinage rights.

            Looking at the big picture, whatever losses Germany or France expect from ending the euro, it pales in comparison to the resentment and bad will created from playing the heavy in the European debt crisis.  As it stands now, the Frankfurt-based ECB has become the enemy of the people.  No one likes ECB or Brussels-based EU dictating economic programs and imposing austerity programs.  What’s good for Germany or France doesn’t necessarily translate into what’s good in less export-oriented economies.  “The spillover from Europe’s heavy sell-off was expected, and not just to our market here, but globally,” said Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Qswego, Oregon, explaining Wall Street’s downturn.  Once the EU decides to junk the euro, foreign markets will eventually stabilize, as currency traders deal in new sovereign currencies. 

            U.S. and European central bankers must take a searching inventory of the continued viability of the euro.  Today’s market uncertainty fuels the kind of sell-offs going on in the U.S., Europe and Asia.  Once the euro experiment and Eurozone nations return to sovereign currencies, markets will sort themselves out and return to more stability.  Unless Europe truly forms one government and one tax base, the common currency can’t work without bankrupting Europe’s less industrialized countries.  Debt-burdened countries like Greece, Portugal, Spain, Italy, Ireland, etc., need to coin their own currencies and, if needed, devalue their currencies.  No sovereign nation should be expected to beg, borrow and steal its currency from a foreign central bank.  Sovereign nations need to float their currencies, manage their economies, control their debt and deal with the fallout from currency exchanges.

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.

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