Sunday, May 9, 2010

E.U. Finance Ministers Kick The Can Down The Road

On the heels of their bailout of Greece, the finance ministers of the 16 member states of the Eurozone have approved a 500 billion euro plan aimed at stabilizing the currency. It would guarantee member states access to €440 billion worth of loan guarantees, and another €60 euros of emergency European Commission funding as a way to shield them from "difficulties caused by exceptional circumstances beyond their control". No doubt the intent is to reassure the bond markets as to the long term viability of the single currency.

The problem is, this package does precisely nothing to address the root of the problem, which is that European governments (and particularly those of the PIIGS countries), continue to spend beyond their means. Giving a government with massive debts access to emergency loans doesn't change the likelihood of eventual default on those debts, it just shifts the moment of truth further into the future. It's the equivalent of paying bills due at the beginning of the month with a credit card that isn't due until the end of it - unless you can cut expenditures in the interim, and/or find a new source of cash flow, it doesn't solve the problem, it makes it worse. As the Washington Post's Robert Samuelson points out in this trenchant, pessimistic column, the long term outlook is even more depressing. With an aging population and massive social welfare commitments looming on the horizon in pretty much every member state, the eurozone's long term prospects for economic growth are dismal. And its citizens don't appear willing to begin tightening their belts any time soon either. That being the case, it'd appear that the smart money is on bets against the euro in the long run.

Bond traders, not being stupid people, realize that. They're going to recognize that the euro isn't any better a long-term investment today than it was yesterday, and at best they'll hold onto their euros a bit longer in hopes of squeezing some short term profit out of them. Then, they'll sell. That is to say, they'll inflate the debt bubble a bit bigger with some good old fashioned currency speculation.

The eurozone boat is taking on water, and the finance ministers' response is to bail it from the back of the boat and dump it in the front. The U.S., Japan, and much of the rest of the industrialized world are in similarly dire straits. And politicians, like the band on the Titanic, prefer to go on playing a happy tune rather than to even acknowledge that there is a fiscal iceberg fast approaching. Ain't democracy grand?

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