The Eurozone was officially formed on January 1, 1999 when the euro was introduced to world financial markets as an accounting currency, replacing the ECU at a ratio of 1:1. Euro coins and banknotes entered circulation on January 1, 2002. The eurozone consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Estonia is due to join the eurozone on January 1, 2011.
The euro is the second largest reserve currency as well as the second most traded currency in the world, after the U.S. dollar. The eurozone is the second largest economy in the world, again after the United States. The euro is managed and administered by the Frankfurt-based European Central Bank and the Eurosystem, comprising the central banks of each eurozone country. As an independent central bank, the ECB has sole authority to set monetary policy. Effectively under German control, the ECB imposes a conservative monetary corset on all eurozone members. This poses significant problems for members, of which there are many, who are unwilling to impose upon themselves equally conservative fiscal policies.
So, of the 16 green bottles until recently standing on the wall, two – Greece and Ireland – have already toppled, while two more – Portugal and Spain – may yet accidentally fall, as bond-market contagion spreads through a realistically vulnerable eurozone system. If yet another – Italy – were also to follow suit, the eurozone is finished and will unravel like so many earlier ill-matched monetary unions.
The only country capable of holding the eurozone together is Germany, whose hard-working, industrious citizens stand far apart from much of the rest of the eurozone. But Germany is a democracy, and any German Chancellor who continuously bails out dissolute and profligate non-Germans deservedly will be removed from office. So, if you were Angela Merkel, what would you do? Surely, I would not be trekking to Lisbon, Madrid, Rome and ultimately to Paris, dragging enormous German soup kitchens in my wake. But then, I would not have trekked already to Athens and to Dublin bearing undeserved German gifts.
Many of the world’s so-called poor do not feature among the deserving poor. They have brought their own troubles down upon themselves. This is surely true of every struggling member of the eurozone. Work houses, and not soup kitchens, should be the expectation for such dissolute members. And if that is the end of the eurozone, so be it. And the current United States government should learn well, and put its own shambolic fiscal house in order.
Tags: bailouts unlikely to prevent collapse, bond markets savage the weak sisters, eurozone in fiscal crisis
December 1, 2010 at 6:16 pm |
Great write up. Countries in the Euro zone, though economically different, are operating under a unified monetary policy which obviously works for some and not for the others. It is quite inevitable for the booming economies to sustain the falling ones as they all willingly signed off their sovereignty in monetary policy.
In the area of being “unwilling to impose on themselves equally conservative fiscal policies” can you please explain how that is possible. It is bad enough that they all have to follow the same monetary policy and that kind of affects the effectiveness of their fiscal policies but working under the same fiscal policy will be suicidal for some. There’s only so much they can do to help their individual economies through fiscal policy and yes they have to align whatever fiscal policy so it can work with the imposed monetary policy but their individuality requires that it can’t be uniform for all 16 countries. Eventually to lift up the falling bottles of stabilize the shaky bottles, the ECB has to break some of it’s uniformity rules (which will look like favouritism) or Germany and any other country economically strong enough will keep bearing the brunt (democracy or not). Either ways, something’s gotta give!
December 10, 2010 at 6:59 am |
I was able to follow this story whilst we were away. I got to see the BBC News take on the story.
Interestingly the Marxists in Ireland began the demonstrations because of the proposed austerity measures.
As soon as I get a chance I hope to be able to read and write up more on the story
You are so correct about the situation for Spain and Portugal. There is a lot of pressure on both countries. The situation with Ireland has led to more pressure on Spain with regard to bond interest rates. My understanding is that the bond interest rates have been rising.