Wednesday, September 21, 2011

USE?

It has been said that the Eurozone countries cannot allow Greece to default because that would lead to the breakdown of the whole euro system. Steps taken by the major euro players France and Germany to prevent Greek default seem to indicate that this is true and we might then see a move towards greater federalization in the EU.

The Eurozone of 17 countries (with a further 8 EU countries obligated to join) led by Germany and France, have already loaned over one hundred billion euros to Greece, that is being paid in instalments or tranches. But, the deficit in Greece due to Government over-spending and bad bank loans is still ca. 320 billion euros. Since Greece has insufficient income (from taxes and other sources) to repay its debts and has still not enacted enough austerity measures, it needs another large incursion of funds to avoid default. Failing that, Greece could leave the Eurozone and revert to its former currency the drachma. And there are other Eurozone countries in great financial difficulties, such as Ireland and Portugal, who might then follow. So to save the situation and support the euro the Eurozone ministers (not including the UK, that is a member of the EU but not the Eurozone), have agreed on two moves. The first is the establishment of a "rescue fund," a large central fund, now past three hundred billion euros, that will be available in future to rescue member countries in financial difficulties. This is modelled on the Federal Reserve in the US, that was established after the dollar failed in the 1929 crash. But the States in the US do not have their own monetary policy or sovereignty, for example the dollar is the same in Mississippi and New York. This is what the Eurozone is striving for, to have a single monetary policy. But, to do that the countries of the Eurozone must give up some of their sovereignty, something that many of them are loath to do, and the richer countries, such as Germany, must be prepared to share their wealth with the poorer, such as Greece. Not a politically popular policy.

Another maneuver the finance ministers of the Eurozone countries have tentatively considered is the floating of Eurozone Bonds, as opposed to bonds of each separate country. So far there is a mixed reception to this initiative, with Germany against it, saying that financial institutions will be reluctant to buy Euro Bonds given that they are designed to prop up a failing currency. A two day meeting of Eurozone Finance Ministers in Wroclaw, Poland, just wound up without any clear decisions. It remains to be seen whether or not any tactics can work, but the overall strategy is that the Eurozone cannot allow Greece to default if they want the euro to continue, and in order to do this they are forced to further federalize Europe. Whether there will eventually be a United States of Europe or the euro will fail remains to be seen.

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