A world in economic crisis

What dangers like ahead for the Euro?

Posted in European Union, Greece, United Kingdom, welfare state by Aussie on February 17, 2010

The fallout from the Greek financial collapse continues to explode. There is no doubt that countries that make up the name STUPID are in trouble too.  At this point in time other countries within the European Union are wondering why they should bail out Greece, and what are the long term implications for the European Union.

Amongst the countries that are sceptical regarding the efficacy of bailing out Greece, is France:

Strategists at Paris-based Société Générale said that any bailout of the stricken Greek economy would only provide ‘sticking plasters’ to cover the deep- seated flaws in the eurozone bloc.

This particular warning comes as the Euro has lost value against the dollar, and the danger signs for a double dip inflation begins to emerge.

Strategist Albert Edward has gone as far as stating that any help given to Greece will be like band-aids, and that ultimately this crisis will lead to the break-up of the European Union.

The warning from the French bank is also echoed by Mats Persson, Director of the Open Europe think-tank, which campaigns for reforms in Brussels. He commented that the Greek crisis has made it clear that the Eurozone was a flawed project from the beginning.  He stated:

Even if Greece receives a one-off bailout it would not solve the real problem, which is the huge differences in competitiveness between the eurozone’s richest and poorest members.

Countries that are highly uncompetitive are normally able to slash interest rates and devalue their currencies to prop up their economies.

But this is not possible within the euro, given its one-size-fits-all economic governance.

What is implied here is that weak eurozone members such as Ireland and Spain will have to suffer years of painful deflation and tumbling living standards, as well as draconian budget cuts in order to adjust to the rigors of being in the Eurozone.

Another critic of the Eurozone is Harvard professor Martin Feldstein who has stated that the euro is in trouble because member governments have no incentive to keep their public debt under control. (read that as debt due to the growth of the welfare state). He states:

There’s too much incentive for countries to run up big deficits as there’s no feedback until a crisis,’ he said.

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  1. charlesrowley said, on February 17, 2010 at 7:29 pm

    To give Angela Merkel her due, however, she does not share the same penchant as Barack Obama for bailing out the losers. In the long run Euroland lives or dies through the economic behavior of Germany. I would put a little money on Merkel. I would not bet the out-house on Obama.

    • ozzieaussie said, on February 17, 2010 at 7:59 pm

      I would agree about not betting the outhouse on Obama. The English example of the welfare state is a good reason to not go in that direction.

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