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?

Maybe This Particular PIG Just Needs A Different Shade Of Lipstick...

It appears the EU's plan to bail out fiscal bad apple Greece has failed to assuage the markets, and not surprisingly so; giving more free money to a government that is already spending what it has and more imprudently to "stabilize" it is the equivalent of putting new siding on a house with a termite infestation, a leaky basement, and a crumbling foundation - it's a superficial improvement that might fool a few uninformed people giving the whole structure no more than a quick glance from the street but won't do jack to reassure anybody with any incentive to give it a closer inspection. Unless the Greeks slash their out-of-control spending soon, which means partially disassembling their welfare state, any bailout they get is nothing more than another cheap patch on a dam that is precariously close to breaking. Given that Greece's political class seems to have little power to impose that kind of austerity on its spoiled populace, it seems quite possible that the country really might end up defaulting, and dragging other troubled economies (Portugal has already been hit with a bond rating decrease in the wake of Greece's troubles) down the toilet with it. It wouldn't shock me if this crisis is someday looked on as the beginning of the end for the euro zone - something that seemed unthinkable not long ago but appears more likely with each shock the markets take.

On the bright side of things, at least we have a canary in the coal mine of massive government debt and unsustainable entitlement spending - whatever happens to Greece, it'll give us some idea of what awaits the U.S. once the bills for the pork-gorging Bush and Obama administrations come due. Be not too cynical and thankful for small wonders.

Greece And The Future Of Euro-Idealism

The Euro-zone countries have agreed on a low interest loan package to bail out Greece, which, at least for the time being, delays but not obviates the need for what is likely to be a nasty sociofinancial correction for the debt-ridden country. The problem, as Johnson and Boone point out in their article, is that this package doesn't solve the underlying problems that gave rise to Greece's current predicament. The country still has an unsustainable GDP-to-debt ratio, and is still hampered by a sputtering economy and massive government liabilities which appear politically impossible to reduce. Bailing them out sends a strong message to countries which are heading toward similarly dire financial straits (Portugal, Italy, etc.) that they needn't worry about getting their own fiscal houses in order. And while E.U. bureaucrats are apparently perfectly willing to order a transfusion to keep the current euro zone intact and send the bill to taxpayers in Germany and other strong northern European economies, it appears that the taxpayers themselves are none-too-pleased about it. Take these three realities together and the future of the monetary union appears rocky at best. How long can it endure while citizens in Europe's wealthiest countries are made to toil to subsidize the indolence and profligacy of their neighbors?

Truthfully, the euro always made more sense as a Pan-European ideal than it did as an economic policy. Bad things tend to happen when you de-couple the monetary situation of a country from intrinsic economic development and render it instead dependent on foreign influences over which it has no control, as the history of interwar Germany attests. That situation was somewhat different, and I'm not saying that modern Germany is endanger of reverting to fascism because its citizens resent footing the bill for Greeks who want to retire and start drawing overgenerous government pensions at fifty. But I do think we're likely to see a decline in pro-E.U. feeling, and the idealism that gives rise to it. Conversely, I expect that nationalist and isolationist sentiment in Europe, which despite a few upticks has for the most part been in steady decline since the end of the second World War, is likely to begin to rise again, and the fact that robust economic powers like Germany are monetarily lashed together with economic basket cases like Greece is going to make that problem worse, not better.