Euro Collapse: What Is the Real Risk?

The media would like us to believe that the Euro-zone is in the hands of Germany.

It certainly looks that way.

Twice in the course of a month, Frau Merkel pulled her weight and got what she wanted from everyone in the EU. It happened first, at the end of 2011, after the Euro Summit of 8 and 9 December, when she succeeded in imposing her rules of the game to the whole of Europe: strict fiscal discipline and austerity. Growth that had been a French and Italian concern was firmly put on the back burner. Even firewalls to defend Euro-government in distress (including additional funds to the International Monetary Fund and the European Financial Stability Mechanism) took second place.

Moreover there was a short-lived moment of euphoria. The media made a show of the 26 countries pulling together around Merkel’s disciplinarian cure for the Euro while one major member of the Union – the UK – opted out with a flourish. Cameron claimed he vetoed Merkel’s proposed amendments to the Treaties of the European Union to “protect the interests of the City”. Of course the City is important for the UK: it accounts for 10% of national product. But the City begged to differ and several bankers publicly complained that they risked losing markets in Europe.

Regardless of what City bankers had to say, the British bulldog found itself out of the European ring. The British generally rejoiced, the media trumpeted that Britain would build a Europe outside the Euro. Conservatives crowed and welcomed Cameron as their new hero.

At the recent European Summit held on 30 January the scene was repeated, with Frau Merkel once again calling all the shots. This time 25 governments agreed to move ahead with strict budgetary discipline rules, handing over stray governments to the Judge’s rules at the European Court of Justice. 25? Yes, once again, the UK pulled out and this time it was followed by the Czech Republic. The Germans didn’t mind – actually nobody minded because the Czechs were deemed unimportant by everyone and the UK’s position was nothing new.

Liberal views (so dear to the Conservatives in the UK and the Republicans in the US) that the government has tostay small and that budget discipline is the key to restore confidence in the markets won the day. Keynes was once again buried. Short shrift was given to the concept that in recessionary times when the private market consumption and investment has collapsed, you need at least one player in the economy to kick start growth. And that player can only be government – precisely what the Germans don’t want to hear.

Yet only with the resumption of growth is there a fighting chance to increase tax revenues and eventually achieve 벳컨스트럭트 balanced budgets. Sure not now, not as long as the recession is on-going, but in the future.

And one should never prospect political measures such as modifying the European treaties when confronted with a market that demands immediate solutions. Frau Merkel’s solution – a change to the European Treaties requiring close fiscal discipline and coordination is necessarily slow. If she has it her way, there will be plenty of time for the Euro to crash before European treaties are adopted.

Because in the last quarter of 2011, there were forces at work to make the Euro collapse: all those speculators betting against the Euro. Result: a huge credit crunch had developed and European bankswere scrambling to shore up their reserves. The last thing they were thinking of was to lend to business.

Clearly a recipe for disaster and depression.

In these attacks against the Euro, American credit ratings agencies have so far played a key role. They have regularly issued warnings and downgrades at the most delicate junctures, precisely when a moment of silence would have been desirable.

For example, just before the December Euro Summit, all three major agencies announced that they were putting the Euro-zone members who still enjoyed a a Triple A rating “under surveillance”. That means of course Germany and France. And small wonder: the German economic model, depending as it does on exports, will necessarily slow down as the recession deepens in Europe and demand for its exports inevitably plunges.

The handwriting is on the wall. By the end of 2011, the credit crunch that was paralyzing European banks was already felt in Asia, where loans and support to business acquisitions slowed down or even froze. If Germany cannot sell to Southern Europe on which it has imposed austerity and cannot sell to Asia because European banks have seized up, who are the Germans going to sell to? The Russians? They’re facing an economic slowdown. The Americans? Come on, the Americans have still to come out of their own slow-moving recession and solve their unemployment problem…

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