The Eurozone’s Failure To Resolve Its Debt Problem

I am not surprised that recent Eurozone (EZ) policy changes and actions did not produce the expected results of improving the confidence in the European markets. The debt crisis continues to spread from country to country. The EZ should abandon the practice of political symbolism, which does little to reduce the continent’s financial problems. The costly bailout of Greece set in motion policies and requirements that the even the healthier EZ countries do not want to meet.

Just this week the leaders of France and Germany met in Paris to reaffirm their support of the Euro. French President Nicolas Sarkozy’s and German Chancellor Angela Merkel’s press statements after their meeting pleased no one and disappointed everyone. The leaders called on members of the EZ to incorporate into their respective constitutions measures (the Golden Rule) that would require balanced budgets, debt reduction initiatives and general financial discipline. They both opposed issuing  collective bonds that would spread responsibility for governmental debt across member states. The leaders also ruled out any immediate increase in the bailout fund. The message that came out of Paris was clear; Germany and France are reaching their limits, both politically and economically, in trying to rescue the floundering economies of other member states. Spain, Portugal and Italy who are on the verge of default understood the French and Germany leaders’ message that they should not expect the same kind of bailout, if any, that Greece received. Germany and France are not going to invest the future of their citizens into additionally risky bailouts. I believe that EZ two healthiest nations have grave doubts that the bailout of Greece was either financially prudent or politically necessary.

Regardless; the joint announcement out of Paris did little to calm the European financial markets. In the days after the meeting the European markets gyrated wildly and moved lower by this weekend. Confidence in European banks is plummeting to all time lows. Banker worry that they will have to charge their better clients more to borrow money. In turn banks will have to pay more for loans they receive. The credit crisis is getting worst by the day. It is not difficult to understand why banks in France or Germany do not want to fund bailout program of Spain, Portugal and Italy; the prospect of being asked to make bad loans requires them to charge their better customers more to borrow.

In an well written article entitled “The Decline and Fall of Europe,” which appears in the August 22, 2001 issue of Time magazine, Rana Foroohar warns of the fall of the old guard. He believes that the golden age of Europe and the West is beginning to fade into history. The ever more dismal economic news coming out of the European continent confirms his assessment. He argues that the EZ is essentially a selfish union. He writes that “…Europeans wants to benefit economically from the proximity to one another and want at all costs to avoid expensive and destructive wars either trade or shooting with their neighbors.” The EZ does not depend on free market principles and global competition to drive and fuel it members’ economies. The EZ’s belief that politics and legislative initiatives could create a dynamic, powerful and unified European economy was naïve to begin with. Foroohar correctly states that the EZ members’ divergent political views, various cultures, and differing social agendas conspiracy to defeat economic unity. If it is to survive as an institution the EZ must re-make itself to adapt to changing times and realities.

If a scientist conducts an experiment to prove a theory and it does not work, he tries a different experiment. The scientist does not keep repeating the same experiment knowing that the result will always be the same. I think the time has come for the EZ to try something different.

Greece: Should it receive additional bailout funds?

On August 2, 2011 President Obama signed into law the bill that Congress passed to
raise the nation’s debt ceiling. The President’s executive action closed, for  the time being, the fractious debate over the nation’s debt. The parties are  now beginning to align themselves for the next round of debates over  national spending priorities. The United States has  relinquished center stage  on the sovereign debt crisis back to the European continent.

About two weeks ago leaders of the Euro zone (EZ) enacted measures to restore
stability in their financial markets. The minister’s enacted these measures as
part of the continued rescue of the Greek economy.  It is no surprise to anyone that the EZ now plots a rescue of the Italian and Spanish economies.

Are the EZ finance ministers better politicians than they are financial managers?

An analysis of the Greek problem helps us answer this question.

After much debate and anguish European leaders agreed about two weeks ago to lend Greece an extra 145bn to solve its economic problems.  In order to attract support for the plan the EZ pledged the creditworthiness of its stronger members such as Germany and France. In layman terms the EZ is guaranteeing that Greece will meet its obligations. This rescue plan is ambitious, though misguided, in that it sets in place a mechanism for future bailouts of other troubled EZ economies.

What is different about this particular bailout is a designated program for  private bondholders. The hope is that current private bondholders will swap their existing bonds for longer-term and more secure notes. The EZ acknowledges that the real return on the new obligations might be lower than the return promised on the exiting  notes.  The banks and investment  companies that now hold Greek debt will be under tremendous political  pressure to take part in this program. The EZ hopes that a debt swap would cut the amount of the cash needed to finance Greece’s debt.

It is not  difficult to understand why a holder of current Greek debt would prefer to paid on it obligation instead of being forced to swap it for new debt.  Most people can recognize a bad investment when  they see it. It is sound financial practice to unload debt that is not likely to be paid. It is obvious that the EZ has structured a rescue package that foremost seeks to solidify the euro’s credibility and then address Greece’s  economic problems. More than anything else this latest bailout is an effort to rescue the EZ from possible demise. Will this tremendous amount of money actually solve Greece’s problems or only delay the inevitable? Should the taxpayers of financially viable EZ countries pay the costs of the financial rescue of member countries who do not belong in the EZ? I do not believe that these taxpayers should shoulder this burden. The EZ should have drawn a line in the sand with Greece. If ever there was  an EZ country that does not deserve a bailout, it is Greece.

The EZ now chooses to ignore its own history. It is a well-known fact that many economists and financial experts suggested that Greece was not economically viable and too politically unstable to become  a member of the European Union (EU). Upon these grounds French President  Mitterand opposed Greece’s admission. Although it was not universally welcomed Greece  became a member of the European Union in 1981.