A European Dilemma
Monday, January 4, 2010
The Eurozone has a problem as the New Year rings in. The few countries that have been demonstrating their economic viability in the 27 nation economic zone have been offset by a handful of smaller, less developed nations that are experiencing aftershocks in the wake of the worst recession in decades.
Countries like the PIIGs (Portugal, Italy, Ireland and Greece) started 2009 by making news as their economies faced disaster; they ended the year in the headlines again as their sovereign credit ratings have been slashed by the major independent agencies.
The problem with the Eurozone is a simple one and fixing it means admitting that the Free Trade and joint economic experiment was fatally flawed.
As nations that are independent economic entities, such as the US and Great Britain, the latitude they have in combating inflation and deflation by altering their monetary policy is evident.
The response that they have to fluctuating valuations is based on their control of their interest rates as well as their ability to effectively “print” more money. The European nations that comprise the Euro (Britain is a EU member but has yet to adopt the single currency) do not have such luxuries.
So, in effect what this means is that when Greece is faced with an internal crisis, in which their debt load is too large for their economy to handle as a result of dwindling tax revenues, the recourse that one has seen in the US and England, which is issuing debt instruments to fund their recovery, is not available (be that a policy in controversy as it may, it still is a policy… ).
As a nation that relies on the Euro, ceding the use of their native Drachma upon joining the EU, they are bound to the whims of the European Central Bank, which is slow or hesitant to act for sake of individual nations.
Had Greece been allowed to float their own bonds, perhaps the situation there would not be as dire as it is today; had the ECB perhaps allowed a specialized bond just for Greece, or any of their needy nations, perhaps the same would have been true.
As we begin a new decade of trading currencies, we look to the solutions for these issues – and while it is not even apparent to those within the ECB that something needs to get done, as the Euro continues its slide in the face of weakness in some of their member states, perhaps they will address the obvious. We can only hope.
Countries like the PIIGs (Portugal, Italy, Ireland and Greece) started 2009 by making news as their economies faced disaster; they ended the year in the headlines again as their sovereign credit ratings have been slashed by the major independent agencies.
The problem with the Eurozone is a simple one and fixing it means admitting that the Free Trade and joint economic experiment was fatally flawed.
As nations that are independent economic entities, such as the US and Great Britain, the latitude they have in combating inflation and deflation by altering their monetary policy is evident.
The response that they have to fluctuating valuations is based on their control of their interest rates as well as their ability to effectively “print” more money. The European nations that comprise the Euro (Britain is a EU member but has yet to adopt the single currency) do not have such luxuries.
So, in effect what this means is that when Greece is faced with an internal crisis, in which their debt load is too large for their economy to handle as a result of dwindling tax revenues, the recourse that one has seen in the US and England, which is issuing debt instruments to fund their recovery, is not available (be that a policy in controversy as it may, it still is a policy… ).
As a nation that relies on the Euro, ceding the use of their native Drachma upon joining the EU, they are bound to the whims of the European Central Bank, which is slow or hesitant to act for sake of individual nations.
Had Greece been allowed to float their own bonds, perhaps the situation there would not be as dire as it is today; had the ECB perhaps allowed a specialized bond just for Greece, or any of their needy nations, perhaps the same would have been true.
As we begin a new decade of trading currencies, we look to the solutions for these issues – and while it is not even apparent to those within the ECB that something needs to get done, as the Euro continues its slide in the face of weakness in some of their member states, perhaps they will address the obvious. We can only hope.
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