8 Questions to Ask About the Euro Crisis
Posted by John Malloy on 12/09/2011
The drama is building over European leaders’ continued inability to solve the debt crisis that threatens to explode the euro zone. Today, the leaders of the 17 countries that use the currency, along with others that are part of the European Union, are meeting to approve yet another Grand Plan. At least three previous plans have failed, and the rhetoric preceding this one has turned positively apocalyptic. French President Sarkozy told his ruling party, “The risk of explosion of the euro is looming” if the plan he worked out earlier this week with German prime minister Merkel should fail.
Now, we know you don’t have time to follow the repeated Grand Plans that emerge from European summits. (After all, you’ve got a business to run!) Instead, read through eight simple questions – the answers to which will tell you all you need to know about the debt crisis.
1. Why can’t Europe just fix this?
The same reason our Congress can’t solve our own debt problem: Politics. And if it’s tough to get agreement here between two political parties, where it takes a 60% majority to get anything done, imagine how much tougher it is in the Eurozone, where 17 different nations (each with its own political cross-currents) have to agree unanimously on any major initiative.
On top of that, there are also the politics of the European Central Bank, or ECB. Unlike the Federal Reserve in the U.S., which has no compunction about creating money to beat back a debt crisis, the ECB’s only mandate is to control inflation. Conjuring up central bank money to throw at a problem tends to cause inflation. Even if printing money is the right move in this particular emergency, it’s against the ECB’s rules.
2. Why all the scary rhetoric now? Is the problem so much worse?
It is because the fear has now spread to Italy. Most of the previous Grand Plans have been all about making sure there was enough money in the European bailout fund to make sure relatively small economies like Greece, Ireland and Portugal made it through. But investors are losing confidence in Italy’s ability to make good on its debts, and there’s no way Europe could raise enough money to bail out its third largest economy. The only entity that’s has enough dough—or the power to create enough dough—is the ECB. And the ECB doesn’t want to.
3. Why don’t they change the rules?
The Germans in particular are against it. Because of their history, they have an overwhelming anti-inflation complex, and they also have a point in terms of equity. The Germans have played by the rules and managed their economy well. Why should they see their currency degraded to bail out countries that have spent recklessly? It’s like prudent American homeowners who resent plans to bail out those who overextended themselves and got behind on mortgage payments. In addition, both sides invoke what economists call moral risk: Bailing out the reckless only encourages more reckless behavior.
4. Aren’t we a bit past that point? The Germans will only suffer more if the euro blows up, won’t they?
Yes. But politics is politics, and Angela Merkel is elected by German voters, not economists.
5. Do they have a plan for the big vote tomorrow?
According to Martin Wolf of the Financial Times, the plan is highly complex, but at the heart of it lies the hope of concessions from Merkel and Mario Draghi, head of the ECB. The key seems to be that both would be okay with having the ECB ride to the rescue to some degree, if members of the Eurozone agree to be fiscally responsible in the future. (Of course, they had already agreed to be fiscally responsible when the joined the monetary union. They just didn’t do it.) Draghi is playing his hand close to the vest, however. In a key speech today, he took several small steps to help head off recession in Europe, and while he urged member states to get their government budgets in order, he made no commitments about having the ECB back up their debt if they did.
via 8 Questions to Ask About the Euro Crisis | Inc.com.
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